Don’t let the numbers scare you! Understanding financials for creative businesses
My sincerest apologies for not getting this post out last week as promised.
The key to having a profitable creative business is to have the right balance of creativity and business sense.
I totally understand that those of us who are creatively inclined tend to get intimidated by numbers. Our eyes glaze over, we start to cold sweat, you start to feel faint…you know how it goes.
We’re just afraid to look at the numbers.
Well, I’m here to guide you through the process of reading and understanding your financials so that you get a better picture of the financial health of your business, and more importantly, make better financial decisions.
The first thing I HIGHLY recommend is:
- GET A BOOKKEEPER OR ACCOUNTANT
It is imperative that as a small business owner you get bookkeeping and/or accounting services. It may seem like an additional cost, but it will serve you better in the long run. When the time comes for you to secure funding or file your income taxes, trust me, you are going to be only too glad that you had been keeping accurate accounting records. There are bookkeepers who work with small businesses and understand the kinds of budgets they are working with and price their services accordingly. Your time is precious and spending hours trying to do the books yourself is not worth it. Develop a system for recording ALL purchases (“Even if you buy a sweetie!” as my mother used to say) and sales and make sure you pass on that information to the relevant experts in a timely manner.
The three most important reports on your company’s financial performance are:
- Income Statement
- Cash Flow Statement
- Balance Sheet
The Income Statement
This is also called the Profit and Loss Statement. For the purposes of small businesses, it’s usually recorded monthly.
It’s basically a calculation of the income earned and the expenses incurred for a given period. It gives you an idea of how your business has been operating over a given period of time. It allows you to pinpoint specific items that are driving up your expenses, for e.g. the fluctuations in the cost of raw materials, cell phone usage etc. It also gives you an idea of what your actual profit (or loss) is.
This is how the statement is organized:
Sales– the amount of revenue generated by the business
Cost of goods sold– the costs directly associated with making or acquiring your products. So in the case of your creative business, it would be the cost of raw materials, duties and freight costs, labels and packaging costs.
Gross Profit– This is calculated by subtracting the cost of goods sold from net sales. It does not include operating expenses or income Taxes.
Operating Expenses– these are the daily expense incurred in the operation of your business. They can be divided into sales and marketing and general/administrative expenses. It includes expenses such as rent, utilities, salaries, depreciation, and other overhead costs such as office supplies etc.
Total Expenses– This is the total of the expenses incurred in running your business, but not including taxes.
Net Income before taxes– this the income earned by a business before paying income taxes. You get this figure by subtracting the total operating expenses from the gross profit.
Net Income- Final income figure after all the relevant taxes have been deducted.
Here’s an example:
|Income Statement For Crest Shoe Company Inc.|
|For Year Ending 12/31/00|
|Cost of Goods Sold|
|Total Cost of Goods Sold||$371,373|
|MARKETING & SALES|
|Sales & Mktg Salaries||$137,243|
|Collateral & Promotions||$13,381|
|Other Sales & Mkt Costs||$3,412|
|Total Marketing & Sales Expenses||$181,349|
|GENERAL & ADMINISTRATIVE|
|Other Overhead Costs||$28,875|
|Total General & Administrative||$223,336|
|Total Operating Expenses||$404,685|
|Net Income Before Taxes||$361,574|
Source: click here
To get started, I recommend this free cloud based accounting system called Waveapps where you can create and send custom invoices, record sales, payments and purchases. And best of all you don’t have to do the reports yourself, they’re generated automatically. You can even generate the accounting reports for specific time periods or compare periods. However, you still need to understand how the calculations are done, as well as the implications of the numbers that are generated.
Stay tuned for part 2 next week where I’ll explain the cash flow statement and balance sheet.
Until next time,