This post was written by Alex Blaelock, good friend, moral support and an independent writer. Alex is full of wisdom about how to do the grown-up stuff we have to do to keep ourselves functioning as small business – which is what independent artists really are. I hope you enjoy this post, and take away something that will help you keep your own little business running more smoothly, or get closer to becoming independent if you aren’t there already.
So many of us drift into creative businesses – we just want to paint, or write, or make music. We don’t want to be bothered with any of that business nonsense – we’re Artists man!
I understand, I really do, but the fact of the matter is that if you want to live on your artistic income, you have to be as rigorous in your business approach as the plumber who fixes your toilet or the electrician who installs your light fixtures. You’re all selling something!
You may have worked in business before so you may have some familiarity with how they operate but bear with me as I explain it for those who don’t.
How Businesses Work
Every business, no matter the size, shares the same core business functions:
- Executive: the strategic planning and direction setting, legal compliance and protections.
- Production: research and development, making your products, controlling the quality, managing inventory, and getting it where it needs to go.
- Marketing: pricing, promotion, packaging, brand presence.
- Finance: budgeting, purchasing, and making sure the money is there when you need it.
Bigger businesses seem to have more functions, but these are divisions of the larger functions. An obvious one is Human Resources, which is part of the executive function – planning to ensure that you have the right people in the right places at the right times to get things done.
Today I’m going to talk about Finance because it’s an area where many people get confused. You might wonder why you should bother, but businesses can claim more costs as legitimate expenses than people. Like a proportion of your rent or mortgage, utilities and internet costs as “home office” expenses. Plus it can be a mite difficult when the Tax Man comes to collect, and you haven’t made any provisions.
Put on Your Business Hat
The first item of business is to take off your artist’s beret and put on your business bowler hat. You need to start thinking more practically and systematically about what you do. There’s plenty of time to be creative when you get back into the studio.
Start tracking your time
The primary purpose of tracking your time is to provide evidence to the Tax Man that payments correspond to periods of work – it’s not money from heaven. This will be less important in some jurisdictions than others, but it also gives you useful information about how long it takes you to complete tasks which you can use for future business planning.
Open a separate bank account for your business
You need a dedicated account for ALL your business transactions. You may not be able to open a “business” account if you haven’t registered a name or secured a business number, but business accounts often cost more to operate than personal accounts anyway. Just make sure that money you get comes in the name of the account. Some banks offer you the opportunity to give your accounts nicknames so you could use one for an extra layer of informal business evidence.
Start tracking the money
In a Rose Madder tinted world there would always be enough money to pay the bills, but while you are establishing your business, it’s more likely to be in the Cadmium Scarlet range than Ivory Black. There won’t be enough coming in to cover what’s going out.
The temptation will be to pay for things ad hoc from your personal bank accounts or credit cards, but this will prevent you from maintaining a complete and accurate record of your business expenditure. It’s much better to make occasional “Owner Contributions” to your business account, so you know how much it costs you to be in business.
You could use one of any number of software or subscription services, but when you are just starting out, they provide solutions to problems that you don’t have so I wouldn’t recommend buying them until your business is making a reasonable amount. In the meantime, you can do just as well with an old-fashioned account book or a spreadsheet. The important thing is to record all the money coming in (income) and all the money going out (expenditure). You’ll need this information for your taxes, and also for your business planning.
The Fiscal Year
The fiscal year; also known as a financial or budgetary year is a period of twelve consecutive months. Depending on where you live it starts at different times; April 1 in Canada, April 6 in the UK, July 1 for Australia, and October 1 for the US government.
You start the year with a budget, known as a Forecast. As the year progresses, you record all your income and expenditure in your Cash Book and update your Profit and Loss with your actuals. At the end of the year, you’ll prepare a Balance Sheet and lodge your business tax return.
As you are unlikely to get a bottomless credit card that never needs to be paid off, you have to think about what you need to buy and how much it will cost. For the first year, you’ll have to take a wild stab at it, but the second and subsequent years you can use your Cash Book for a more realistic estimate.
In business, this is known as a Forecast (or Cashflow). It’s your prediction of when money is coming in compared to when it is going out. It’s useful for planning how to manage lean months, knowing when to negotiate with creditors, and when to hustle for commissions.
Without that bottomless credit card, you need to make sure there is enough money to pay for the things you are buying.
Every time you pay or receive money, you record all the details in your Cash Book – dates, where it came from, where it went to, and what it was for. Even if it’s not cash – the record keeping system dates from a time when cash was more or less all there was to banking.
As your business grows, you will develop a list of expenditure categories called a Chart of Accounts. It’s like a paint box, but with compartments for money instead of paint. For example, you might start with one for Art Supplies, and when you buy Art Supplies, you record them in that Account (compartment). But over time, you might want to know how much you are spending on canvases, paints, or brushes and split your Art Supplies account accordingly. Your Accounts feed information back into your planning and product pricing.
At the end of each month, you add up how much income you received and how much you spent on each Account (e.g., Art Supplies) and update your Profit and Loss statement (the actual version of your Forecast).
At this time you can check to see whether you need to do something to control your spending. This might involve reconciling your Art Supplies account by checking your payment records to ensure that it accurately describes what you have spent.
You will also reconcile your Cash Book against your bank account to make sure they agree on how much money you have.
At the end of the year, you prepare a Balance Sheet from the information in your Profit and Loss. In essence, your total debt deducted from all your assets to get the exact amount of your business’ value.
You will also use the information your Profit and Loss to compile your tax return.
Other Useful Records
As you use money throughout the year, there is some other useful information to keep track of.
Accounts Receivable and Payable
You need to know who owes you money, and who you owe. In as much detail as you can – invoice numbers, dates issued and paid, amounts paid and owing, terms of payment, client information.
Knowing that you have 90 days to pay for your Art Supplies gives you the opportunity to shuffle your money around in the meantime.
Your inventory is money sitting about waiting to be used. Not just your products that you have on hand for sale, but also the components that go into your products. You need to record the number, price and dates your bought your components as well as the stock on hand. Plus, you need to track which parts go into which pieces and the date and price you sold your products for.
If you have employees, you need to pay taxes, insurances, and comply with the relevant laws such as workplace safety and workers compensation.
Writer and philosopher Alexandria Blaelock advises embracing the things that matter like beauty, friendship and wisdom. She is the author of two personal development books describing how rational thought about activities like getting dressed and feeding your friends can lead to the kind of pleasure that makes life worthwhile. Discover more at http://alexandriablaelock.com/.
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