30 Jan The biggest financial f*ckups made by creative businesses
There are many different types of people who run ‘creative’ businesses – from fashion designers to filmmakers. While they face different challenges, there is one area that tends to unite them all: the dreaded matter of money.
Finance isn’t just a dirty word for many creative types, it can actually inspire genuine fear. After all, many creatives have actively avoided all things math-related since high school, so getting up to speed down the track can be tough indeed. Oh, and let’s be honest: most people think finance is pretty much the most boring subject on earth. Sometimes, I wouldn’t even disagree.
The fact remains, though, if you’re running a business – any business – you need to understand the figures if you’re going to have any control over your future (or even next weekend). With this in mind, I’ve put together a few of the most common mistakes I see creative business owners make through my work as an Accountant and CFO. So, if you’re wondering if (or where) your finances could be going wrong, this could be a good place to start.
Too much DIY
It can be tempting to do your own bookkeeping, BAS and tax, especially when you’re starting out. Accountants don’t work for free – and most creatives are apprehensive about the prospect of having to communicate with one of these strange creatures! While it’s admirable to want to ‘do it yourself’ (and some creatives manage to do so very well) it can often be a risky way to go.
Sure, some aspects of finance are relatively simple, and programs like Xero make them even simpler. But some aspects are pretty tricky for any person to figure out (creative or not!). By having the help of a good accountant, even on a quarterly basis, you can avoid nasty surprises… like that $12K tax bill your forgot about, or that departing employee you didn’t realise needed 103 days of leave paid out (oops).
In a nutshell, a professional will identify and keep an eye out for all the ‘what-ifs’ and have contingency plans ready to go. Yes, they cost money – but in the long run, they’re likely to save you a lot more.
Not many business owners have time to stay on top of their financial status every week, let alone keep up with the yearly cycle. But there is a cycle – and those tax bills don’t actually come out of nowhere. If you’re aware of what’s just around the corner (whether it’s super that’s due, or equipment that needs to be bought) you can make smart decisions about what you spend, and when you spend it.
The immediate advantage of timing your purchases is that you have a thorough understanding of your cashflow, and can plan purchases accordingly. You’ll know when you’re flush and pay six months of rent upfront, and you’ll know when you need to tighten the purse strings. With the help of an accountant (or by doing your own homework) you can also take advantage of things like small business tax write-offs when they’re available.
Not knowing how much you’re actually making
One problem that many of my creative business clients have had is misunderstanding their actual business profit. The fact is, there’s a lot more to your overall business performance than how much cash you have. You need to take into account non-cash expenses (think pre-payments and accruals) – things that won’t be immediately obvious when you take a glance at your bank account.
To get a good idea of how much you are actually making, you need to have a solid understanding of all your business expenses, factoring in things like depreciation and upcoming expenses you’ll need to pay. This stuff is generally contained in your income statement (also called a profit and loss, or more simply P&L), something that few creative people are ever taught to interpret!
Not charging correctly
The age-old question of “how much do I charge?” is one that’s plagued creative people since the beginning of time. Even if you have industry benchmarks to go by, it’s hard to put a figure on creative output, and all too often it ends up being a random figure plucked from the air that ‘feels right’.
The issue here is pretty obvious: if there’s no structure behind what you charge, how do you know your overheads are being covered (not to mention your time). Rent, Wi-Fi, employee salaries, website hosting – these are all non-negotiable costs that most businesses will need to pay monthly. So, it’s essential that you’re factoring these into your estimates. An expert will actually calculate this using a formula, but even working out your monthly overheads in total is a good start.
Not knowing where the gold lies
Those who have worked in larger creative businesses (such as multinational advertising agencies) will be familiar with the concept of a timesheet. It’s not the most fun thing to complete, but the fact is, time-sheeting (or job coding) is an essential for any creative business.
Why? If you don’t know where your time is being spent, you won’t know which jobs are actually making you money – and (critically!) the ones that are burning a hole in your bottom line. At any given time, you’re likely to have several jobs on the go, and it’s highly unlikely you’ll be making the same profit on all of them. Why not work out which jobs are your big earners, and try to attract more of them? Or, why not identify which jobs are a waste, and eliminate them all together?
Not getting paid
This one may seem ridiculous, but the reality is, the biggest reason creative companies go out of business is that they carry out work, and don’t get paid. Often it’s as simple as clients refusing to pay their invoices, but sometimes creatives don’t invoice accurately to begin with – or even forget to get sign-off at the start, leaving them no legal leg to stand on.
Chasing payments is no fun. But for most people, it’s a fact of life. Programs like Xero have auto-reminders that you can set, which are triggered once a payment is late – but I tend to think a personalised message works even better. If you’re a tardy client, it’s much easier to skip over an auto-generated email than ignore a personal text, so consider your message format too.
Lastly, it’s a good idea to get paid a percentage of any job upfront (50% is not unusual in most creative businesses) and ensure your terms and conditions are solid, and available on your website.
Whew. Still with me?
The truth is, managing finances isn’t a walk in the park for anyone, so if you’ve made any of the errors above, you’re far from alone. And the good news is, there are very easy ways to remedy most of them. Finance may not be as fun or glamorous or rewarding as the creative skill your business is based on – but if you get it right, it can enable you to make a living out of what you love. And at the end of the day, that’s what it’s all about! Happy to help, learn more here.