Artists, Musicians, and Financials, Oh My! Doesn’t Have to be Scary.
I was invited to present at a self-employment in the arts conference where my audience was artists, musicians, and other self-employed artist types. My topic was “Financials and the Arts”. I have experience presenting financial literacy to executive directors of nonprofits, so I had a sense of the relationship between understanding the mission of an organization and understanding the financials of an organization. These artists had a very strong sense of mission, but not much of finance.
I began by explaining the three financial statements. The profit and loss statement is like your paycheck. If you worked 40 hours a week at $10 an hour, your take-home pay was not $400. It was less due to taxes, insurances, and other deductions. This is how the profit and loss statement works. Your revenue minus your expenses and then you get to take home the difference in the form of profits.
Your cash flow statement works like your personal debit card. If you have money in your account, you can draw funds from your debit card or pay bills with it. You don’t have to put money into your debit card account every day in order to use it every day. When you run out of money, the balance is zero. Your debit card will not work. Cash flow in your business works the same way. If your company has a positive cash balance in the bank, you can write checks or use your company’s debit card. If your balance is zero, you will not be able to use the company debit card until you deposit more funds into the company bank account. “Cash is King” is a phrase all business owners will learn to appreciate.
Your company balance sheet is like your mortgage on your home. You may have a home worth $150,000. You will invite a friend over and say, “Come on over to my house and we can paint together.” If you have a mortgage, then you do not own the entire house. For example, you owe $100,000 on your mortgage which means your equity is $50,000. In other words, you own one-third of your home, and the bank that holds the mortgage owns two-thirds of your home. The company balance sheet works the same way. It tells what percentage of the company the business owner owns and what percentage of the company the bank owns.
One last concept I try to drive home is that financials are only a reflection of the business. If you want to improve the financials, then you have to adjust the business operations to effect the change. An example I use is “The Bean” in Chicago. If you Google “The Bean,” you will see a silver bean with reflections of the Chicago skyline on it. If you wanted to change the images on The Bean, you cannot wipe them off with a rag. You will have to change the Chicago skyline to change the reflections on The Bean. Financials work the same way.
You cannot just change the numbers on your financials to show a profit, you will have to improve the operations to show a profit. Financials are a reflection of reality and cannot be changed unless you change the reality.
You do not need to be an accountant to own a business. I appreciate fine art, but you wouldn’t want to commission a painting from me; I have zero artistic talent! Likewise, I may not want you to do the financials for my business. As a business owner, you need to know “enough” to know when something is wrong. Then you can seek out a financial professional to help correct the issues. You are a subject matter expert in your field; learn to seek out other subject matter experts to benefit your business.