How Becoming Financially Savvy Can Give you Clarity & Confidence in Your Creative Business

I love helping women that are running or launching a creative business become more 'business-y' without boring them to death. Why? Because I love all things creative and I want to buy more of your art, fashion designs, shoes, handbags and services so I don't want you going out of business!

Did you know that you can be creative and financially savvy?

"It's taken me a while to get over my belief that you have to be on the bread line to be running a successful creative business. Now I realise it is about making money...we sell designs, we make money, then we can be more creative and take on more new projects!"
- Johanna Bamford, Designer/illustrator

Imagine what it would be like to understand your business numbers and get financial clarity. It will help you to make better decisions that allows you to grow your creative business so that you can spend more time creating.

Finding more profit and cash in your business involves becoming more cash flow chic.  Yes, you may have an accountant or bookkeeper but you still need to stop being so freaked out by the numbers and stop avoiding them.

You may well ask, how do I do that Ally? Well I am going to give you some tips:

  1. Set your goals for the year - know your destination, financial or otherwise
  2. Know your business model and understand how you will make money
  3. Bring in the Cash or Crash, 'Profit is a myth, Cash is reality' - so lets get real!
  4. Create your own shop front and get the word out to your ideal clients 
  5. Track your progress and course correct if necessary

 

Lets look at these in more detail:

 

  1. What is your financial goal for the year?

A goal is simply a destination, if you don't have a destination how can you plan to get there and how will you know if you have arrived?

That said, a business shouldn't solely focus on financial goals, other targets like increasing the value that you provide to your clients and developing your employees will ensure that you  stay true to your Mission Statement. 

Activity: Write down your financial goal for the year and break it down into monthly and weekly goals, this will make it seem more achievable. For example, if you want to turnover £100,000 this year then on a monthly basis you need to make £8,334 per month (that's £100k /12), £1,923 per week (that's £100K/ 52) or only £385 a day (That's £1923/5).  
 

2. What is your business model and why should you care?

Your business model is the way that your business makes money.  How easy is it for you to make money, what is your upfront or premium product or service? Will these products and services help you to achieve your financial goal?  

Activity: Create a Profit Pyramid: Keeping it visual, draw a large triangle on a sheet of A4 paper and split that triangle horizontally into the number of your service or product categories.
At the very top write in your premium product or service. This is the product that you should promote first and down-sell into your lower end products or services. 
The bottom section of your pyramid should be your sample or freebie that you will offer if a potential client cannot afford or is not ready to purchase your higher end products. The middle section should have your mid-range categories. 
Beside each section you should decide how many of each category you need to sell and think about your capacity. It's all very well saying that you want to sell 1000 tote bags this year but do you have the capacity to produce 1000 tote bags?
Insert the selling price that you hope to achieve and this should give you the total revenue or income for the year, does it match your goal? If it doesn't this means that you have to tweak your offerings or your pricing.

One of my favourite tools to use with my clients when I begin working with them is the Lean Canvas by Ash Maurya. It consists of nine building blocks of business that helps you answer the question what is my business model? It is adapted from Business Model Canvas by Alexander Osterwalder. By creating your Profit Pyramid you will be able to complete the revenue section of the canvas.

 

 Download Your Profit Pyramid Template

 

Have you built in an element of recurring income? This can be achieved with retainers, even makers can include a regular workshop or training into their business model so that you have some level of monthly income coming in that covers some of your costs. 

Can your business model be scaled so that the business continues if you are on holiday or need to be away from the business for some other reason? A business that depends on you and you alone is a J.O.B. in disguise.

 

3. Cash or Crash

Why focusing on sales instead of profit is a mistake

As mentioned above, if your pricing is too low you will not be able to make a profit. The goal isn't just sales, it's to ensure that you make a profit from each sale unless you have a loss leader strategy.

You may lower your prices to enter the market and make easy sales. However, strategy or not, discounting of any sort must be done with caution, it may lead to more sales but erode your profit without you realising it.

Know the value of your products or services and develop the confidence to ask for a price that reflects that value.

Know your full costs and follow a formula to work out your target price.

The old adage:

"Turnover is vanity, profit is sanity but cash flow is king"

is so true.

Think about this simple example: 

  1. Turnover/Revenue = £100k   Costs = £99K
  2. Turnover/Revenue = £10K     Costs = £1K

Which would you prefer? 

Of course the £100K turnover looks more impressive but in fact only produces a profit of £1k. The second business model makes a profit of £9K with a turnover of just £10K which I am sure takes a lot less effort and stress to generate than £100k.

However, going a step further, focusing on profit instead of cash flow is a no no for small businesses.

The other more important but less well known quote is:

 'Profit is a Myth, Cash is Reality"

This eludes to the fact that profit in accounts is an art not a science and can be manipulated, really! You could be selling stuff on credit and showing an accounting profit but until you get that cash in your hands, profit means nothing. Which is why a profitable business can and many do go bust.

While aiming for profit is important for every small business, the number one goal has to be cash flow because no cash flow, means you can't pay your bills or wages and you've gone bust! Therefore, for some business decisions you have to weigh up profitability v cash flow. Some contracts may pay well, but if you have to wait too long before being paid, your cash flow can be stressed to breaking point.

Don't just plough on with your business without having a pricing strategy that will make you profits, without having a credit control policy that means that you invoice as soon as a job is complete and chase slow payers and without having a (yawn!) cash flow plan. Yawn today and you may well be putting your business to sleep tomorrow.  

Activity: Create your Cash Flow Forecast or Plan that shows when you expect to actually pay money out to suppliers and staff and when you expect money to actually come in from clients. Use a template and if you hate spreadsheets ask your accountant to help you with it.

If you have a very simple business you may be able to do this with pen and paper especially if you restrict your cash flow plan to just a few weeks ahead.

 

Download your 13 week Cash Flow Template

 

4. Create your Own Shop Front

Well, how are you going to get sales? If you don't market your offerings how will your ideal client know you exist? 

In order to do marketing even when boot strapping and doing it all yourself you need a budget of time and some cash. In terms of money, your marketing budget should range between 2% to 20% of your sales to keep your prospects rolling in.

If you are full to capacity the lower end could suffice to maintain interest in your company as you never know when even a long standing client may call it a day.

Marketing should show a return for your efforts. Having a marketing budget of time and/or money helps with decision making: When you are approached by some advertising pro who is trying to convince you to have a stand at a trade show, you can consider whether it is within your marketing budget and if so ask questions about what return you should expect.

Set up a marketing plan so that you can plan your events and take advantage of public holidays for special promotions. 

Activity: I find it useful to have my clients create a Critical Marketing Tasks Chart. This lists all the marketing activities to be carried out along with deadlines and the names of the people responsible. Detailed costs should also be assigned to each activitiy. 

 

5. Tracking your Progress

Fall in love with your business numbers and K.I.S.S. your financial reports.

If you want to Keep It really Simple Sweety, track these three key numbers in your business:

  • Sales
  • Profit
  • Cash

Track at least these three metrics or measures every month, amongst other insights, they will tell you the results of your marketing,  they will tell you how much taxes you may need to pay - ouch but at least you avoid nasty surprises!, they will tell you if you can afford a new piece of equipment - much nicer, and they will tell you if you are on track to reach your financial target or where you need to course correct.

Relax, you don't have to calculate these numbers yourself, your bookkeeper or accountant will give them to you, ideally by the 10th or 15th of the subsequent month in the form of a Profit and Loss Report, a Balance Sheet and a Cash Flow Statement or just a summary if these reports are just too much information for you. 

Activity:

If you are brave enough to do your own bookkeeping as well as carry on your creative activities, you can set up your financial system to spit out these numbers at the push of a button.

It's best to build your budget first. A budget simply lists your company's income streams and costs and shows how you plan to make a profit. Don't forget to plan to pay yourself a decent salary, drawings or dividend- even if this doesn't happen for a while. 

This will form your customised 'chart of accounts' in your bookkeeping system so that the financial reports reflects your particular business' transaction and you will better understand them.

If you don't use software and only deal with spreadsheets, getting these numbers will be more fiddly, consider upgrading to some super accounting software like, Wave (free), Freeagent (not free), Xero (my favourite) or Quickbooks. 

To wrap up, becoming financially savvy without even having to do the bookkeeping or accounting yourself, means that you can relax and feel in control of your creative business at last!