Mastering the business of creativity includes becoming proficient with your money, minutes, marketing, and management. Of these four, money and marketing are the two that many creatives avoid most. And while marketing is often neglected, money is both neglected and perhaps a bit disdained.
Maybe the creative mindset just doesn’t like math. Or maybe it’s the false notion that “fine arts” (the kind less concerned about commercial applications) occupy an elite status—and the more we concern ourselves with money, the further removed we feel from our core artistic identity.
Whatever the reason, an aversion to money, numbers, and financial reports is a huge loss to creatives. Because when you ignore your numbers, and when you can’t or don’t review your balance sheet and your cash flow projections, you lose out on valuable information that could save you countless financial crises, and many sleepless nights.
Most of the financial problems, common to creative practices, can be seen coming a mile away. If only you could hear what your money is saying. The end result of not listeningto your money can be closing up shop. Or, even if financial crises don’t sink a practice, they certainly put downward pressure on the quality of your work. Who does their best work when stressed about over cash flow, or losing sleep over mounting piles of unpaid bills?
What You Could be Hearing, If You Listened to Your Money
Here are three very basic things your money can tell, if you listen to it.
Financial Reports Will Tell You if You’re Operating Profitably. Creatives are great at telling stories. Unfortunately, sometimes we tell them to ourselves. When we’re struggling with cash flow, we tell ourselves that the next project will be different, the next quarter will have more opportunities. But if you want to know whether you’re really operating profitably, or a loss, or at break even, look no further than the bottom line of your balance sheet (or, actually the second to the bottom line). The trend line of your total equity never lies. If this number is steadily trending upward, you are operating profitably—how big of a trend represents the degree of your profitability. But if it is flat, or declining, you are not making a profit. Period. There is zero mystery. This simple number measured over time will always tell you the truth.
Cash Flow Will Tell You if You’re Heading for a Crisis. A cash flow forecast is a simple spreadsheet that aligns your anticipated receivables, alongside your expenses, over time. If the only financial number you’re aware of is your checking account balance, and your most recent invoices, you are guessing at your cash flow with only one side of the ledger in view. Your bank balance, and your incoming revenue, are next to meaningless, unless they are set alongside the expenses that will be incurred over the same period. Only then can you know if your revenue is contributing to project profits, or whether you’re going to have too much month left at the end of the money.
Your Books Can Tell You if You’re Headed for Revenue Recognition Quicksand. This is perhaps the most difficult financial pattern to account for in managing your creative service’s books. But it is also a common failure, that crushes many firms and practices. This is the serious distortion that occurs when you receive revenue before you have earned it.
If you bill half of your fee upfront and half upon completion, a common practice among creatives, you are most susceptible to this distortion. While your bank balance will make you happy when you deposit that first payment, it might be that you’ll end up having more work to do, to meet a project milestone before you get that last payment. And perhaps, by the time you do, that final payment won’t be enough to cover all the expenses you’ve incurred over the course of the project. Have you ever been desperate to finish a project, in order to collect the final payment, knowing that even when you do, you’ll still be underwater? Maybe as you struggle to complete it, you’re already striving to close a new project—to get another deposit in the bank. Of course, that only sets you further behind in this cycle. When you do this long enough, or when you have multiple projects all contributing to this cycle, you’ll end up in deep water. You’ll find yourself working harder than ever, but with a decreasing bottom line to show for it. That’s extremely discouraging!
Operating a Business Without the Benefit of Staff Accountants
Companies that employ CPAs and bookkeepers are going to get clued into some of these common financial traps, and hopefully get enough of a heads up to correct underlying problems. But when you neglect your books, or get by with glorified invoicing platforms that don’t offer true financial reporting, or if you hire a bookkeeper to simply update your accounts and reconcile your statements, you’re losing out on all sorts of truth – painful truths perhaps, but information that you need to know, information without which you may get pulled under.