Your money has a voice. And that voice will never lie to you. It won’t flatter you either. Your money has important things to say, and you need to learn how to listen to it, if you’re going to run a sustainable, profitable, and enjoyable practice.
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We’ve been working our way back through the five subjects that organize this podcast and this week we’ll return to the topic that began our journey, the topic of money.
Understanding your financials is a fundamental and critical function of running a business. Unfortunately, art school doesn’t usually offer courses on finance, or even basic math. I got great grades in math during high school, but by my sophomore year in college I actually had to spend several minutes trying to remember how to do subtraction in order to simply balance my checkbook! Our math muscles atrophy quickly from lack of use—and as creatives that part of our brain is often suffering from neglect.
But when we go into business, either as a freelance creative, or all the more if we decide to run a firm, we’re going to have to get our brains back in gear as we learn to read and understand our financial numbers.
Fortunately, when it comes to the math part managing your books, most of the heavy lifting is done for us. Accounting systems like Quickbook to all that adding, subtracting, and reconciling. And spreadsheets calculate our totals and subtotals automatically. And quite often you can have your accounts updated automatically. All we have to do is keep them up to date, and more importantly, learn how to understand and interpret the reports these systems provide.
When it comes to understanding the financial fundamentals for running a professional services company, there’s not all that much that we need to master. Fortunately, most creative service companies don’t have to deal with inventory, capital expenditures, or sales tax. And so our inputs, and our reports are relatively basic.
There are really only three reports that we need to review with some regularity. Two of these are reports that any true accounting system such as Quickbooks or Xero, can provide with the simple click of a mouse. These are the Profit and Loss report and the Balance Sheet. If you’re not using a true accounting system, but instead depending on simpler systems that primarily manage invoicing, they will not be able to generate these two reports. It’s well worth your time to move your finances into a system that can quickly provide these two essential financial reports.
The third financial report, which I described in episode 4 is a cash flow projection spreadsheet. And while all three reports are important, your cash flow projection is the most important for managing your weekly and monthly financial planning and decision making.
And so over the next three episodes I’m going to explain each of these three fundamental reports in a bit more detail, and how each one provides a different glimpse into your financial performance.
Learning about financial reports is not nearly as exciting as learning some new creative technique, or diving into a new project. But if you take the time to understand these simple reports, and how to interpret them—if you learn how to listen to what your money is saying—you’ll gain important insights that can ensure that you have the wherewithal to continue enjoying your creative practice for a long time to come. So next week tell you about the profit and loss report, so you can gain more profit and experience less loss…
So until then: don’t let the business of creativity overwhelm your creative business.