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!