Financial Management - getting the right financial result by managing your income and expenditure

Many creative entrepreneurs tell me that finance is not their forte; they are driven by a creative passion and find financial management boring or confusing – or both.

Creative people are often not primarily motivated by money, yet financial management is an essential part of any enterprise, creative or not. So an understanding of financial matters can quickly pay dividends..

Money matters

There are three different ways of looking at money matters; each provides a different view of an enterprise and is useful in its own way.

Firstly we need to understand the relationship between income and expenditure over a particular period and whether income exceeds expenditure or not, resulting in a profit or a loss. This period might be retrospective, as in the case of a set of historic accounts, or a forecast of expected performance for a future period. These ‘Profit and Loss Accounts’ - or ‘Income and Expenditure Accounts’ (same thing) – tell us about the financial performance over a period.

Secondly the Cash Flow tells us exactly when money went into and out of the business bank account and is particularly useful in looking ahead at likely scenarios – the cash flow forecast. Even if a profit is forecast for a future period, cash flow might be a problem if at certain times more money is going out than coming in. Cash flow relates to the comings and goings of real cash and its management is crucial. Business failures are most often due to cash flow problems.

Thirdly, the Balance Sheet provides a ‘snapshot’ of the financial position of an enterprise, by showing the balance between its assets and its liabilities at a point in time, usually the last day of a financial year. (Note that the balance sheet is not about income and expenditure.)

Creative businesses have to prepare accounts for HM Revenue and Customs (HMRC) and for any investors or funders, but the first purpose of accounting is to enable the owners and managers to understand their enterprise properly so that they can manage it even more effectively.

Hidden subsidies

And to get a true financial picture, all costs need to be calculated and understood – hidden subsidies can distort the picture and lead to an inaccurate understanding of how things are going. These hidden subsidies can arise from unpaid labour and the use of external assets for business purposes. So a self-employed photographer, designer or musician whose creative enterprise is making a profit because they are using their partner’s computer, a personal mobile phone and the family car without paying for them is probably not truly profitable at all.

Charging accurately for the use of these assets gives a more realistic picture of the situation (as well as a lower tax bill). Unpaid labour similarly distorts the true picture and so should be accurately quantified so as to understand the real costs of the business and therefore its profitability (or lack of it). These matters are particularly important in preparing accurate budgets for projects and charging the right prices to clients.

It pays to plan your finances. Not only is it a matter of good financial management to forecast your enterprise’s income and expenditure (and cash flow), it’s essential if you are to attract investment from other people or organisations.

Any investor, from the commercial or public sector, will need to be convinced that their money will pay dividends, either in terms of financial reward or public benefit. The last thing they or you want is for the enterprise to become insolvent.

Raising money

There are several ways to raise the necessary finance for creative enterprises, including personal investments from the people concerned, grant funding and equity investments from third parties such as ‘business angels’, friends or fans. Larger investments are classically provided by commercial investors but many creative enterprises have used ‘crowd-financing’ or ‘fan-financing’, ie lots of people investing small amounts. For example Jill Sobule raises money this way and veteran band Marillion raised money from fans. Hannah Rudman has written about digital fundraising and Slice the Pie enables people to invest affordable amounts in musicians and take a share of the financial rewards.

Equity financing involves selling shares in the enterprise and consequently there are repercussions for ownership and control of the business. A suitable organisational structure needs to be chosen if raising money this way is the financial strategy, ie a Company Limited by Shares rather than a Company Limited by Guarantee. See blog on Structuring your Enterprise for more details about structures.

So raising money and managing finances is connected to other issues including structure and relationship with funders or investors. It will be necessary to take advice from accountants and other professionals on some financial and legal issues. At the same time there are plenty of opportunities to use creativity and raise money in new and imaginative ways.

Copyright © David Parrish 2009. www.davidparrish.com