….I will be traveling on Friday, thus the ArtBiz101 series is being posted a day early.
Finance for an artists business plan is an attempt to look at the long range cash flow and for a small business plan, not more than five years. You may be making investements over a longer peroid, such as a house/studio, but as you try to understand the potential cash flow, it is difficult to go much beyond five years. One expection is to be putting a little away for eventually “retirement”, when you are unable to create artworks.
Finance also encompasess immediate cash flow record keeping. For the day to day finance issues (also known as accounting and bookkeeping), I will address those asepects next Friday. So what follows is very simple and I am not a tax expert, so this is just some advice about things to thing about. If you have any questions about what you can or can not do, please consult a tax expert or accountant.
One of the key aspects of Finance is to help make long term startegy decisions. Do you need to supplement your artistic income while the demand for your artworks grow? If so, how much for how long? What do you need to purchase now, versus later? How much cash do you need to live on? How will that change over the next five years. What do you expect to sell over the next five years? What volume at what price will give you that sales volume? Do you need to apply for grants to bridge the cash flow? Can you provide artwork to a gallery on consignment or are you going to need to get some amount of cash up front? What are going to be the effects of a galleries commission if they will pay you 40% of sales? Or 50% of sales?
The best way to develop a nice Financial plan is to set up seven columns, labeled: Item, Year 0, Year 1, Year 2, etc. Then below the Item you will have Sales and next Expenses. Leave a bunch of rows blank. Then under Sales, what are you going to sell or received cash from? Could be prints, teaching, books, speaking, grants, or another job. For each of these, try to determine what the cash recieved will be for each of the yearly colums. Don’t work about what it cost for the print that is sold, that will be in the next section. What I find best is to have on another sheet how was this number calculated. Such as 50 prints at an average price of $500 each, or 10 20×30 prints at $1,000 each and 40 16×20 prints at $550 each. The more detail, the more chance to track what actually happens to adjust the budget the next time.
Repeat this same process for where you are going to spend the cash for creating your artwork, which we call Expenses. Such as film, printing paper, and other expense items. Also include commission expenses paid to a gallery. These are all business expenses that you don’t pay taxes on. Some items may need to be depreciated, which is a purchase made for a large expense item that you can take a tax credit for over a number of years. This is where having an accountant or CPA (Certified Public Accountant) is going to come in handy to help with the pros and cons of large investments.
The difference between the Sales and the Expenses is the profit, from which taxes will need to be paid. In the U.S.A, we have Federal taxes and State taxes. We all pay Federal Taxes. Some states don’t have taxes. Maybe a reason to relocate? And there all sorts of other taxes, but you will probably pay about 30% or more of your profits to taxes. Now we have the estimated amount that we can pay ourselves and live on. Is it enough? If not, you may need to work on some alternatives to help provide more money to live on.
You will want to repeat this for non-business personal budgeting, include your presonal expesnses; food, housing, utilities, clothes, incidentals etc. This will help you decide if your profits figured above are going to be enough.
A little financial planning now can possibly save some big money headaches later on!
Best regards, Doug