Note from Mark: for this lesson I’ve asked Sarah Thelwall, founder of MyCake Financial Management and an expert on money matters for creatives, to explain how to keep track of your money – and make more of it!
When you wake up at 3am in a cold sweat about your finances, how do you reassure yourself?
That shoebox of receipts won’t help, because it can’t answer your questions or tell you how to improve things.
Many creatives see financial management as the thing they do at the end of the financial year, to fill in the boxes on a tax return. But this is a one-way process of feeding information to the tax office – it’s designed to help the government, not you.
Instead, you need a system that helps you manage your finances simply and quickly. A system that gives you information that helps you run your business better, gives you peace of mind – so that you’re free to focus on more creative things.
Financial management may feel overwhelming, but there are basically just two key activities – recording and analyzing, and the good news is that neither require you to become a master of Excel.
The even better news is that with the wide array of online book-keeping systems you can be pretty confident that once you’ve recorded your information the system will offer you all sorts of analysis as standard, and usually in easy-to-understand pie charts and graphs.
If you are an employee
The lesson is most directly relevant to freelancers and creative entrepreneurs. But even if you are an employee, it’s worth reading through it – understanding the basic financial challenges and opportunities facing a business is one of the things that will help you to see the big picture and make yourself indispensable.
One thing you definitely need to know is whether you are working in a cost centre or a profit centre within your organisation. A cost centre is a department such as Human Resources or IT, that provides vital functions for the business but does not contribute a profit. A profit centre is a department such as marketing and sales, which drives income into the business.
If you are part of a cost centre, then the financial emphasis will be on managing costs in line with the growth of the business. So if you want to contribute new ideas, you will gain extra brownie points for finding ways of doing things more cost effectively as the business grows. And if you are part of a profit centre, the emphasis will always be on income generation and profitability – so if you want to add value, start thinking about new ways to generate wealth.
If you can learn to read the monthly management accounts and start to see the patterns in income and expenditure then you will get better at working out when the best time is to suggest new ideas. For example, don’t suggest spending money on a new project at a quiet time in the income cycle!
If you are running your own business there are two essential types of information you need to record (income and expenditure) and one method for double-checking that you’ve not forgotten anything (reconciliation).
If you’re just starting out, or if your financial transactions are very simple, you can manage your books (accounts) using a spreadsheet.
If your business is more complex, or you want to be better informed about financial patterns in your business, consider a book-keeping system that will not only make it easy to record figures, but give you a range of tables, charts and other ways of analyzing the data. (We have plenty of tools for analyzing and benchmarking your figures at MyCake.)
You should aim to do your accounts at least once a month – i.e. recording your income and expenditure, reconciling with your bank account and filing the relevant documents.
If you’re one of the many creatives who put off their accounts until the end of the financial year, then stop for a moment and recall:
- how stressful it is not to be clear about your financial progress and responsibilities
- what a weight off your mind it is when your accounts are up-to-date and you know your financial affairs are in order
Every month that goes by, one or the other of these feelings will increase – depending on whether you set aside time to do your accounts. It’s up to you to decide which it will be!
Whenever you request payment from clients or customers, you should issue an invoice (for payment within a certain timescale) and/or receipt when payment is received. In addition to detailing the products/services supplied and payment due, you need to number each invoice, and include the date and terms and conditions of payment.
You need to record all the invoices you send out. This is not just because the tax man needs an accurate record of your income but because you need to track whether clients have actually paid the invoices you’ve sent them. If they don’t pay on time then you need to know when to chase them (and indeed what interest to charge them).
Time to deal with that shoebox!
You need to keep and keep track of all your receipts – even for small items – for your own records, and in case you need to provide proof of your outgoings.
It’s OK to use a shoebox under your bed, as long as you empty it regularly. But you might find a folder or desk drawer more convenient. The most important thing is to process the receipts before you forget what they refer to!
The worksheet for this lessons gives you a step-by-step guide to processing receipts, which will save you a major headache at the end of every financial year.
The third regular task is to reconcile your accounts with your bank account – i.e. compare the two records and check for any discrepancy. each month when you receive your bank statement. This is to double-check that the records you are keeping are accurate.
If you are using book-keeping software then it should make this process easier, by generating a list of incoming and outgoing payments that you can check against your actual bank statement.
Once you have your raw data in the system, you can look for patterns – and make adjustments that will make your business more profitable, efficient, and easier to run.
When you do your monthly accounts, you will probably start to notice patterns, and it will help if you build in a little time for reflection and analysis. It’s also a good idea to set aside regular time (e.g. yearly, quarterly) to look at the big picture of your finances, review your progress and set yourself targets for the future.
But what should you be analyzing? The following questions give you a good place to start:
- Which clients are responsible for 80% of your income?
- Which sources of new clients – trade fairs, conferences etc – deliver the greatest return on investment?
- How long does it take you to get paid once you’ve issued an invoice and are some clients better/worse at paying you on time?
- Which of your products have sold best in the last 12 months?
- Are there annual peaks and troughs in sales and how does this compare to when you spend money on production or marketing?
- Are some of your products seasonal or do they all sell steadily all year?
- What percentage of your turnover do you spend on raw materials?
- What are the highest areas of indirect cost? (e.g. rent, marketing)
- How does this expenditure compare to other businesses of a similar size, sector and stage?
The worksheet will show you how to get the answers to these questions from the data you are recording. Once you have the answers, you’re in a position to make business decisions that will reduce your risk, increase your profitability, and make sure you are focusing on the most effective elements.
For example, once you know your most profitable customers, you might think up new ways to help them, offering them better customer service or new products/services that complement what they are already buying from you. Conversely, you might decide that your least profitable customers are more trouble than they are worth, and ‘fire’ them!
If you notice seasonal variations in your income, you could choose to either ‘fix’ the problem by finding new sources of income during quiet times – or take advantage of the lulls to schedule a well-earned holiday.
And analyzing your sources of new business will help you optimize your marketing efforts. If you find conferences give you a poor return on investment, stop going. If networking events are a happy hunting ground for you, look for more of them. And if your email newsletter brings in a steady stream of business, look for creative ways to attract more subscribers and make your messages more effective.
This is the fun part, and the payoff for your patience in recording your monthly financial figures. Once you have the data at your fingertips, you can use them to dream up new options for making your creative business more rewarding in every sense.
Special offer for 21st Century Creatives: For an online toolkit to help you manage the financial side of your creative business, you can sign up for a free two month trial of MyCake. Quote the code ‘PATHFINDER’ when you contact MyCake, and you will receive a free 1 hour consulting session by phone, analyzing your figures and giving advice on how to improve your financial performance. To sign up for the trial and claim your free consulting session, get in touch with Dawn Lane via the team page.
Forward Financial Planning Useful for New Year or an annual review at another time in the year.
9 Methods for Mastering Your Money by J.D. Roth
The Road to Wealth Is Paved with Goals by J.D. Roth
7 Lies We Tell Ourselves About Money by Ramit Sethi
25 Of the Best Books About Money by J.D. Roth
Tune in next week …
…When we’ll look at how to protect your work and avoid infringing others’ intellectual property rights.
About The 21st Century Creative
Copyright © Mark McGuinness 2010-2019