A Little Financial Knowledge Goes a Long Way

One of the biggest financial issues preoccupying many creatives is determining the value of what they’re worth. Curiously, far fewer creatives concern themselves with knowing what their business is worth. That’s a shame, because they could be earning a lot more if they had just a little bit of financial knowledge.

In control or driving blind

Running a business without understanding its finances is like driving a car without a dashboard. You have no idea how fast you’re going, what’s ahead, or whether you have enough fuel to get you where you want to go.

Many designers tell me their eyes glaze over when they look at financial statements. They have a bookkeeper or accountant who takes care of those. Let’s go back to our driving analogy. Who’s behind the wheel, you or the bookkeeper? You, of course. The bookkeeper is just the map reader. You’re the one setting the course, controlling the speed and the brakes. You need all the data you can get to help you make the right decisions and determine the best route to your destination. If you’re just guessing, you could end up in a ditch.

Three key financial documents

You don’t have to immerse yourself in all the financial details of your business to have enough financial knowledge. To maintain control, though, you should be familiar with three essential financial documents:

• Balance sheet — This is a tally of all the business’s assets (what you own) and liabilities (what you owe). It shows the net equity (how much you have left after you’ve paid everything you owe). This is what your business is worth financially.
• Profit and Loss statement — This is an accounting of how much revenue or income you took in during a specific period (e.g., month or year), along with what you paid out for cost of goods sold, overhead and other business expenses before paying taxes or taking draws. The much-referred-to “bottom line” shows your net profit or net loss for the period covered. In short, this document tells you if you’re making any money.
• Cash flow statement — This document allows you to predict future sales as well as your cash position. Revenues tend to go up and down from month-to-month due to project schedules, billing cycles and economic shifts. You want to be sure you have enough money on hand each month to cover that month’s expenses. In addition, this document can help you budget better by anticipating dips in revenue or additions to expenses before they happen.

Why are these three documents so important? Because your business is more than just your creative work. The number of projects you’re doing, the number of new inquiries you’re receiving, or the amount of money flowing into your bank account are not reliable indicators of how well your business is doing. That’s like trying to assess how healthy you are by the amount of food you’re eating. The success of your business depends on what you are earning, not just on what you are doing. You can go broke while working yourself to the point of exhaustion.

Schedule regular check-ups

Keeping an eye on your financials does not need to distract you from your creative work. Have your bookkeeper or accountant walk you through each of the statements described above so you understand what information they contain and how it affects your business. Then, meet with them at least once a month to review all three statements. I also highly recommend asking them to provide you with a brief weekly update summarizing your current assets, current liabilities, total hours billed, and the number and dollar amount of unpaid invoices over thirty days past invoice date. These are your business’s vital signs.

For whatever reason you own and operate a design business, you have an interest and a responsibility to make it as successful as possible. Unless you understand the financials, you can’t properly budget, know whether or when to hire, plan for growth, or guard against a sudden loss in revenue.

A lack of financial knowledge is a common reason why many small businesses fail within the first five years. Spending just a few hours each month reviewing the three key financial statements can make all the difference between having a business and managing a business, as well as increasing your financial confidence.