Running a business requires keeping a close eye on the ins and outs of your money. If you ignore this life blood of your business, you may soon find yourself out of business and deeply in debt. Learning to read your profit and loss statement can keep you out of debt, and give you insights into where your financial pressures are coming from.
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The creative process is deeply engaging. It’s easy to get lost in exploration, experimentation, and the play of creative problem solving. Doing your books and reviewing a profit and loss statement, is well, not quite so deeply engaging. And so it’s no wonder that most creatives neglect their finances, choosing instead to focus on their creative work. But while you’re busy working in the studio, your money might be walking out the door.
As a creative business owner, you’re going to have to make time for managing your money. For example, establishing a budget for your business. But setting a budget doesn’t automatically mean you’ll keep it. You have to set your budgets, and monitor your spending as you go. And while you’re at it you’ll want to keep track of how much money you’re earning, especially how much you’re earning after taking out the costs of providing your services, and the costs of simply running a business.
That’s where your profit and loss statement comes in. A P&L is a simple report that shows how much income comes in each month, as well as how much money goes out, and of course how much was left—your net revenue. But for a profit and loss statement to be helpful, you’ll need to set up meaningful and helpful categories for both your income and your expenses, using your chart of accounts.
For example, if you make money offering logo design, as well as print and web design, you’ll want to create separate income accounts for each. Maybe you also make money doing small tasks for clients, like changes to previously designed pieces with updated information. A separate income account for these smaller routine tasks can show you exactly how valuable maintaining client relationships is to your business. You might find that certain services are more lucrative than others, and adjust your sales and marketing to cultivate those opportunities.
The same goes for your expenses. You can set up distinct accounts for office expenses like your rent, utilizes, supplies, equipment, and office software. And other categories for marketing expenses, and perhaps for some for professional services and professional development. By establishing these categories you’ll be able to see exactly where all your money is going, so that you can budget more accurately, or adjust your spending if you see areas of waste.
When you set up your profit and loss, and your chart of accounts, there’s one important subcategory to keep in mind. You see some of your expenses are going to be directly connected to delivering your services. These are commonly called costs of goods sold, or perhaps in your case, costs of services sold. For example, if you include printing costs in a quote, and then pay the printer directly, those expenses are the cost of goods needed to make that revenue. Or if you have a fixed fee project, but hire a contractor to do part of it, that contractor’s costs are also a part of your cost of services sold.
Your profit and loss report will separate these costs and deduct them from your revenue to provide your net revenue, after the necessary costs of that revenue are factored in. And if your revenue were to decrease, so would your corresponding cost of goods. And so it’s helpful to distinguish between overhead expenses that occur regardless of your sales, and those that are directly tied to your revenue.
Once you have these accounts set up, and a system that can quickly generate reports, you’ll gain an accurate and insightful view on where all your money’s coming from and where it’s going. As you manage that better, you’ll increase your profitability. Next week I’ll provide you with some more tips in structuring your P&L, adding budget categories we often leave out, and end up paying for later.
Until then: don’t let the business of creativity overwhelm your creative business.