Yes, it’s the F-word. You don’t need to become a financial expert overnight, but understanding the basics is definitely achievable, and will make the running of your business an awful lot easier. We spoke to US-based Amy Northard, a certified public accountant – who styles her firm as ‘the accountants for creatives’ – to break down the initial steps that every creative business owner should undertake. While the steps outlined here will be similar no matter where your business is based, the specific advice is accurate to US laws and rules.
Personal vs business bank account
‘The easiest thing to do first is get separate bank accounts. A lot of creatives tend to use their personal bank account for income and expenses, but the sooner you separate your accounts, the simpler it will make your bookkeeping over the year. If your business isn’t running under your own name, talk to your bank about what documentation – tax ID number, registration documents – it requires to open an account. This can vary between banks, so make sure you have everything together before you start.’
Amy’s top tip: Once your account is created, put some money in to open it – this money won’t be considered as income for the business.
Pick a bookkeeping software
‘Do your research and choose some bookkeeping software that you can keep up with. Though they’re great, they can sometimes be overwhelming, especially when you’re starting out. So, if using a spreadsheet is something you feel comfortable with, go ahead with that. But if you reach a point where there’s too much manual work and it’s too time consuming to maintain the spreadsheet, that’s a good time to consider switching to a bookkeeping software to automate that. Once you’ve chosen one, sync it with your business account. After pulling in the transactions, some systems require you to perform an action to make them show up on your financial statements.’
Amy’s top tip: If you’re focusing on the creative side of your business and putting off the bookkeeping, that’s the time to consider hiring an accountant.
Reconcile your accounts
‘Reconciling is the process of matching your bank statements to the bookkeeping software. Go through the process every month and match the transactions in your bank account to the ones on the software, making sure you’ve not missed any and there’s no duplication. The reconciliation process can vary depending on the software, so research before you start.’
Amy’s top tip: Reconcile your accounts every month, or at least every quarter. Leaving it until the end of the year can be overwhelming as there’ll be too many transactions to log.
Set up your income statement
‘If you’re a sole trader using a spreadsheet for your accounts, you can easily create an income [profit and loss] statement by totaling up your income and highlighting your expenses using different categories. Most bookkeeping software has its own template and will generate an income statement once you’ve categorized your transactions. Being descriptive with the category names will allow you to see how much each income stream is bringing in – and what’s causing the most expense.’
Amy’s top tip: Really break down your transaction categories. For example, if you own a ceramics business, instead of simply classifying your income as sales, go further and divide it into pottery sales and workshop sales.
Organize the balance sheet
‘A balance sheet shows the balance of your bank account, credit card account and owner’s equity, and gives you information about your business for a snapshot in time. You’re likely to need a balance sheet when you’re applying for a small business loan, a business program or looking for investment. If you’re using a bookkeeping system and keeping up with the reconciliations, you can create a balance sheet automatically; when done manually they can be quite time consuming and require accounting chops. Reviewing your balance sheet will give you an idea of how much cash is available versus how much debt the business has.’
Amy’s top tip: Knowing when to create a balance sheet depends on the type of business you’re running. If you’re a fast-moving company, it’s helpful to create it quite early on (even at the start). But if you’re an artist, for example, a balance sheet isn’t a requirement when you begin.
Save for a rainy day
‘Ideally, you want to have three to six months’ worth of cash available at any time in case of emergencies. You could build this by putting aside a percentage of your sales every month or quarter, and creating a separate savings account to hold this money. But what I do is track my average monthly expenses over the past 12-month period and multiply it by three (or six) to figure out my goal amount. Having this money saved allows you to make a big purchase, or to deal with emergencies, without causing your business to fail. As a creative, it also takes the pressure off, allowing you to pick the projects you enjoy working on because you’re not worrying about where your next dollar is coming from.’
Amy’s top tip: If you have a big pot built up, you can disperse it to yourself at the end of the year, as long as you still have a minimum of at least three months' worth of money saved.
Account for taxes
‘If you’re worried about spending the money before you send in your taxes, create a separate tax savings account where you put in any money that you’ve collected as sales or service tax. Do the same for income tax, adding roughly 30% of your profit to your personal account instead. Use these accounts to pay your taxes at the end of each quarter or financial year. Don’t consider the tax you’re collecting from your customers as an expense – in this case you’re basically a middleman who’s collecting it and then transferring it to the government.’
Amy’s top tip: Check your local area or government website to understand the tax requirements you’re subject to. Some states might have different taxes applicable. For example, in the US, Texas has a franchise tax, but not all states do.
Useful websites and software
• QuickBooks, Xero and Wave (which has some free services) are all good bookkeeping platforms to get you started.
• If you’re looking to monitor your personal budgeting, Mint is a free and user-friendly budget tracker.
• Use NerdWallet to compare business bank accounts and business credit cards, all in one place.
This article was first published in Courier issue 43, October/November 2021. To purchase the issue or become a subscriber, head to our webshop.