I have been developing assumptions and financial sheets, including Income Statements, Balance Sheets, and Cash Flow Projections. And yes, that is just a boring as it sounds, at least for me. But, I have a renewed clarity for how I see Worthwhile Studio in its startup phase, and how it will look as it grows and matures into a big girl business. Please watch my screencast to understand how Worthwhile Studio plans to blossom and grow!
So, I knew the financial class was going to kick my “a double s,” but I also knew this was a weak area for me in my other business endeavors. Artists, let me tell you, making financial statements is both tedious and rewarding. My first pass at the Income Statements and the assumptions therein was lost due to a power outage. The second round was respectfully tossed out by my professor as well, just plain wrong. My ego had to take a few days to rebound, and after a whole lotta whining and “I don’t wannas,” I finally sat down to the tedium and discovered the rewards of creating (mostly) accurate assumptions about my business activities.
The rewards came in the kind of clarity that gave me a glimpse into the future financial standing of the ideas I have been diligently developing over my graduate studies in entrepreneurship. Being a keenly visual person, averse to numbers and math in general, I had no idea that numbers could create an image of a company. But indeed they do, and I feel as if I have been baptized through fire trying to learn this lesson.
I cannot say I would drop my dreams of being an artist to pursue financial planning, but I can say I have a newfound respect for those who relish spreadsheets, balancing acts, and crystal balls full of excel equations. In the future, I will certainly employ someone with those proclivities to help me make sense of my business’s financial picture.
Seasonal Cash Issues in Small Business
The majority of small businesses have some measure of seasonality. When it comes to weathering the ups and downs of the seasons, adequate cash flow is imperative. Thorough planning, forecasting, and consistent review of financial reports can help managers mitigate the effects of seasonal sales and better prepare the business for future growth in lean times.
Seasonality in small business has two sides. There are issues with a seasonal increase in sales, such as how to manage a large inflow of cash, or how to fund the creation of goods and services before a busy season. On the flip side, there are issues with a seasonal decrease in sales, such as how to make payroll or sustain the business while sales are slow. In areas where travel and tourism make up a large part of the local economy, many small businesses will have an influx of cash during the peak season, and then sales will fall off as the tourist season wanes. The weather also has a strong impact on sales, especially in businesses that rely on a particular kind of weather for robust sales. The increase in demand for goods and services around the holidays can also pose challenges in labor and production.
Small businesses, especially new start ups, may have considerable challenges in managing cash flow. Cash flow refers to the company’s inflow and outflow of cash, and whether or not the company is seeing a profit from its activities. Ray Thompson’s article Understanding Cash Flow: A System Dynamics Analysis (1986), states that the “ ‘rules of the game’ are distinctly different for the small business.” Being under capitalized, “they depend on various sorts of short-term financing such as accounts payable, accruals, and lines of credit (Thompson, 1986).” Established, large corporations, while not immune to cash flow issues, tend to have adequate internal capabilities to manage cash flow during lean times.
The bottom line for any kind of business that experiences inconsistent sales is that cash flow management is imperative to the success of the company.
Planning for a slow season can be easier said than done, but there are a variety of financial statements a business creates that can help managers forecast cash flow issues. Forecasting helps a business decide what options are available to the company to remedy cash flow issues due to seasonality. One of the best things a manager can do is develop monthly sales, spending, and cash flow forecasts. Monthly reviews of these reports can help the manager understand the seasonal peaks and valleys, consider borrowing options, and help forecast and plan future profits.
So where does a small business look for cash flow in lean times or as a busy season approaches? There are a number of tried and true techniques for accessing cash.
The first and easiest place to look is in accounts payable and receivable. Most businesses operate by hoping their clients will pay as soon as possible, while simultaneously trying to pay their own bills as late as possible without incurring overdue costs. If the business demands payment from accounts receivable, they can quickly increase cash flow just by calling in profits that have already been made. A business manager can also develop vendor relationships with flexibility to pay later, allowing the business to keep cash on hand a little longer. The second place to look for increasing cash flow is the business’s savings and investments. A manager who understands the peaks and valleys of the business can make an effort to save for seasonal cash needs, and liquidation of investments can often free up cash, although there may be penalties involved with this solution. A third option is to borrow money. A business may already have lines of credit available. If not, developing strong relationships with banks and other lenders throughout the year can help ensure cash when needed. A fourth option is to look for alternative operations/products for the slower seasons, creating an offseason demand that brings in a new source of revenue. And finally, a seasonal business may simply decide to hire during their busy season, then lay off employees as the season ends, perhaps even closing the business until the next busy season.
All of these options require knowledge and understanding of the business’s cash flow needs. Through monthly review of cash flow statements, managers can plan and prepare for the cash needs from season to season.
It is important to understand that these kinds of reports are living documents. A cash flow statement is simply a snapshot of the company’s cash at a given point in time. However, with multiple years of statements showing the inflow and outflow of cash, a manager can begin to forecast the lean and fat times of the business.
Reviewing the reports on a monthly basis can help a manager foresee a cash flow issue and address it before it becomes a problem. In essence, keeping an eye on financial reports allows managers to plan, forecast, review, and adjust for cash flow throughout the year. The point is to keep a positive cash flow in the slow season and not mismanage cash during times of increased profit.
References
Soto, A. (2017, March). How to Balance Cash Flow in a Seasonal Business. [Blog Post]. Retrieved from https://articles.bplans.com/how-to-balance-cash-flow-in-a-seasonal-business/
Thompson, R. (April 1986). Understanding Cash Flow: A System Dynamic Analysis. Journal of Small Business Management. (Vo. 24, Issue 2), pp. 23-30.
As artists, makers, and creative entrepreneurs, numbers are huge part of success. If you are not keeping track of your finances, then you cannot measure your success (or failure) effectively. And what is the point of pursuing a creative business for it to essentially become a non-profit company that disappears into the ether?
Embracing the titles of Artist, Maker, and Creative Entrepreneur require you to also embrace the power of understanding finance. You are no longer allowed to say, “I’m not good with numbers.” Many artists joke that they became creatives because they are so bad at math. I’ve said so myself. However, if the age-old concept of the starving artist is getting left behind, then why not dispose of this cliché about artists being bad at math as well! If you have any success at all as an adult paying bills, car payments, mortgage, or at the very least feeding your dog, then you are not as inept at numbers as you believe.
Understanding the rules of finance is really more about learning the language of finance than about being good at numbers. So, for your education, I would like to discuss some finance terms and how they relate to an arts-based business. Let’s start with the most basic financial statement, the minimum requirement for any arts-based business.
The Income Statement
The Income Statement is one of the most useful tools in your financial toolbox. As an artist, you will use the income statement to review and manage your financial activity, manage your financial resources, and create effective budgets. The income statement uses your sales and expenses to understand your profits or losses in your business. In it’s most basic form, the income statement is:
Sales – Expenses = Gross Profit/Loss
Artists should always keep detailed track of their sales. The income statement can help you keep track of the kind of sale, such as a print or an original piece, whether the purchase was made with a cash, credit, or some other form of payment, if the sale was through a gallery, online, or private, and any other valuable sales information.
Expenses should also be carefully monitored. There are many ways an artist can create expenses. Expenses can be incurred along the way from creating the work, to selling it and shipping it. Understanding where your money is being spent in the process is important to creating strong profits. Many times sales are adequate, but spending is too high.
Finally, subtracting your expenses from your sales will give you the gross profit or loss of your business activities. However, you must understand the terms gross and net.
“Gross income is the amount that a business earns from the sale of goods or services, before selling, administrative, tax, and other expenses have been deducted. For a company, net income is the residual amount of earnings after all expenses have been deducted from sales. In short, gross income is an intermediate earnings figure before all expenses are included, and net income is the final amount of profit or loss after all expenses are included.”
There are a lot of different expenses that must be considered after finding your gross income, and many of those expenses vary from state to state and what kind of business you have created (i.e. LLC, Corporation, Sole Proprieter). Just know that your gross profit is not the same as your net profit, which means you cannot go spending all of your gross profits.
The value of the income statement is in the details. You can analyze the sales and expenses to better understand where your business is succeeding and where it can use some help. The income statement will help you file taxes, apply for loans, grants, and other funding, and even track your performance and sales trends from year to year. The income statement is one of the most basic statements that can help you monitor the health of your business, so start tracking those sales and expenses today!
Photo by 
Worthwhile Studio 