Managing Your Money
“My theory about creativity is that the more money one has, the more creative one can be.”
~ Robert Mapplethorpe
If you don’t yet know the difference between cash flow and profit and loss, don’t worry. We have an entire masterclass on financials to make you sound like you should be working on Wall Street. Sorry, we didn’t mean to scare you. Suffice it to say that money works a little bit differently when you’re in a business. You may have to adjust your rates a bit to cover overhead on the front side. But on the backside, you can write off a lot of your life through your business.
The good news is that if you get really good at being creative and running a business, you can have someone else do the books and manage all those pesky tasks like invoicing, billing, collecting and such.
There are many different ways to look at money and how to manage it. The Twitter version goes like this:
- #Profit and Loss – is the money going in and going out each month or quarter. This determines if you are making money or losing it. Over time, you can use Profit & Loss Statements to project what the future could look like based on historical profit and loss (P&L statements).
- #Cash Flow – this tells you exactly when money went in and out of your bank account. It’s a more immediate, real-world view of your financial situation since a business can fail rapidly if the cash flow continues to be negative. Unlike P&L, you aren’t factoring in other variables such as money billed but not yet received.
- #Balance Sheet – this is a snapshot of your business’ overall finances. It includes things like long-term liabilities, the assets you already have in the company, such as your own investments, etc. It is designed to give you a crystal clear view of your finances since all the things that are often left out of other reports are shown on a Balance Sheet, giving you an accurate picture of the state of your company.
You should be familiar with how these three financial statements work together to give you an accurate picture of your business at any time. Sites like GoDaddy Bookkeeping do all these things for you. You can connect all your business accounts, including PayPal. The system will keep all the records you need, including tracking your expenses, putting them into categories the IRS likes to see in your annual tax filings, and generating P&L statements and cash flow projections that lenders want to see.
Introduction: Are You Ready?
1. Thinking Like a Business
2. Business Structures
3. Access to Capital
4. Creating Revenue Streams
6. Finding Customers
8. Creating a Winning Pitch
9. Effective Negotiation
10. Intellectual Property
11. Managing Your Money
12. Going Global
Overhead is the cost of doing business. It can be the space you work in, the computers or tools you use, paint and brushes, raw materials; all sorts of things. There are two types of overhead, fixed and variable. Fixed costs are the things you have little control over such as rent, insurance, heat, lighting, etc. You can exercise more control over variable costs. This includes the materials you use, shipping and energy consumption.
Before we go much further, you need to be sure you keep your business and personal expenses and income separate. The IRS and banks don’t take kindly to blending these together. The IRS may classify your new business as a hobby instead of a bonafide business if you do it too much.
Let’s look at some of the activities and items you can legitimately write off as overhead:
- Studio or office rent
- Studio/office utilities
- Marketing and publicity costs
- Stationery and office supplies
- Accountancy and bookkeeping fees
- Professional memberships and subscription
- Books, eBooks, magazines and journals
- Postage (baseline level, not trade orders)
- Travel – taxis, trains, flights etc. (baseline level, not particular projects)
- Travel – in own car (see note below)
- Insurance premiums
- Computer software
- Computer and printer consumables
- Equipment: computers, cameras, printers, etc. (see Depreciation below)
- Repairs and maintenance of equipment
- Training costs
- Meeting and subsistence expenses (coffees, lunches etc. when on business)
- Other items that are specific to your specific creative pursuits
These are all fixed costs as they don’t tend to vary significantly no matter how much (or little) business you have at any point in time.
As noted earlier, other costs – supplies, goods, services, raw materials, postage, travel and even professional insurance – can vary over time. Even though they aren’t fixed, they still impact your cash flow and bottom line. There’s a tendency not to think about every tangible expense you have as a business, most of which can be reported and deducted from your taxes
Personal vehicle use
Then there’s your personal vehicle. If you are using it for business, you want to keep a logbook in the car to log mileage to and from business activities, the nature of the business conducted, fuel purchased and any meals or lodging. The deductible rates for these vary from year to year, so you should use an online service of an accountant to figure out how the use of your vehicle affects your taxes.
If you have a dedicated office or workspace in your home, this may also be deductible. Typically, you take the square footage this space takes up and divide it by the total square footage of your house. This generates a percentage that can be used to calculate the portion of utilities used by the business. If you run a business that is mostly or totally online, you may be able to make a case for the cost of higher Internet bandwidth than you would ordinarily have if you were just living in your home, mainlining Netflix.