SEEING MONEY: TIPS FOR CAPITALIZING ON YOUR CASH FLOW
The rare, endangered Oryx are making a comeback in the desert near Dubai because, unlike most photographers, they've learned to master cash flow.
Posted July 9, 2009 by Doug Menuez for RESOLVE
Setting aside the technical skills, the perfect portfolio, the eye, the heart, and the soul that are all so important if you’re going to be a photographer, let’s focus on what you’ll need to be a financially independent photographer. That means setting up a well-organized small business operation that can support your creative endeavors. And the first thing to consider with a business — before the branding, marketing, or anything — is the money. Where will it come from, where will it go, and how much will you need at what times. Whether you’re thinking about launching your first business or already have one, the following information will help you stay solvent and sane.
“The first thing to consider is the money — where will it come from, where will it go, and how much will you need.”
First, make a plan
The most important thing to do when you’re creating (or updating) a business is to create a business plan. Even something simple will help, and you can find them all over the internet. Basically, you want to create a projection of your cash flow over your next five years. Where is the income coming from? What will your expenses be? How are these both likely to change over the years? Who is your competition?
I know it’s hard to make yourself sit down and do this; I didn’t when I first started and eventually things turned out ok — but I learned some hard lessons. When I finally made a plan, all my decisions were based on my defined goals. I could measure my progress and thereby gained tremendous control over my life and career. The following suggestions will ideally become part of your larger business plan, but they can also be helpful taken on their own.
What kind of business are you?
You’ll need to decide if you want to set up a sole proprietorship, a general (or C) corporation, an S corporation, or a limited liability corporation (LLC). To decide which is right for you, you’ll need to consult with a lawyer, and he’s probably going to want to see a business plan. If a lawyer isn’t an option, there is good information online and at the library, but also consider finding a business-savvy friend to lend their advice.
Yes, you need to learn bookkeeping
It’s best to handle bookkeeping yourself at first, so when you start to grow and hire a real bookkeeper you’ll understand what they are doing and can direct them. Google “bookkeeping” or find a simple text book. Buy Quickbooks or a similar software and read the manual — it’s a pretty good tutorial. Make a Chart of Accounts: a list of income and expense accounts allowing you to track monies flowing in and out. Expense accounts are divided by expenses required to do business, known as Cost of Good Sold, which include anything you spend on production, and Fixed Expenses, which include things that are regular overhead costs like studio rent, insurance, payroll and telephone.
Set up a file cabinet with folders for corresponding expense accounts to keep the paid bills. Once that’s done, create your first projected budget, which will include your best guesses on income and expenses. As you enter the actual expenses and income and review that information, you will really start to learn what small business is all about.
“As you review your income and expenses, you’ll start to really learn what a small business is all about.”
Make reports for Accounts Receivable and Accounts Payable, and set up alerts for when they are 30, 60, and 90 days old. It’s so important to establish a routine where you review your bills and reports on a regular basis so you know what is happening with your business every day. For instance, you should be checking your A/R to determine which are older than 30 days so you can follow up for collection. Never, ever be late on credit-reporting vendors like credit cards.
Make your computer work for you
You’ll also need software to help you run your business. I’ve always used a customized version of Filemaker that incorporates a number of subset databases such as a contact manager and an estimating and billing module. Usually the invoices are then entered by hand into our bookkeeping software, but there are some programs that have bookkeeping built in. And some bookkeeping software such as Quickbooks allow you to make invoices.
If you can find a very cheap standalone program that does everything, great. Otherwise, I recommend keeping it simple with Quickbooks for invoicing and bill paying. Set aside a clear place for incoming bills (some people like an accordion folder), and schedule a time every two weeks where you enter all the bills into Quickbooks. I’ve been told I’m crazy for this, but I also created a spreadsheet in Excell where I can export my important data in a special format that allows me to analyze it more easily. Details on my blog. Once a month you will also need to reconcile your bank accounts. This is not as horrible as it sounds. I have found online banking to be pretty good now, and often bank systems will link directly to Quickbooks.
Where is the money?
Your biggest problem starting out will be cash flow. It’s important to get paid quickly for your first jobs, to pay your vendors quickly so you don’t damage your credit, and always pay yourself first. The temptation is to keep funneling cash back into the business, but if you don’t pull out money for yourself and your retirement from day one, you never will. Incorporate Paychex and put yourself on payroll. Make sure your paycheck includes enough for savings and auto-deduct to an IRA.
Because cash flow is hard at first, you should have enough saved up to cover your overhead, including projected taxes, savings, and marketing costs, for six months, or at least three if you are super-confident. On a regular basis, look at your bank balance and calculate if you’ll have enough to pay your vendors over the next two months — remember that “The check’s in the mail” is ALWAYS a lie. Try to set up accounts with your main vendors that allow you to pay up to 30 days out. If you are really tight, call your vendors and negotiate for more time. It’s better to stay in close contact with them about problems, with a note, a call, a bottle of wine…
Find a good accountant
Finally, you need an accountant who understands all the ins and outs of photography in case you get audited. It may seem unlikely, but I’ve been audited four times and it all went very well because I always report my income. I believe in paying my share to keep the system going, however imperfect. Taxes suck — get over it. It’s a sign you are making a living and that’s a good thing.
CASH FLOW: SMOOTH THE CYCLES
One of the hardest nuts to crack for any freelancer is how to manage cash flow. I’m the first to admit that most of this is theory and putting it into practice takes nerves of steel. I’ve gone through phases where things are better planned, and phases where I’m so caught up in a special project or on the road shooting to the extent it’s just not possible to stay on top of things. If you can afford a business manager or bookkeeper or have a spouse or someone that can oversee and do some or all of this for you, fantastic. Currently we work with a business manager and review the payables with him and work together but I can rely on him to handle it if I’m out of the country. But as I’ve said, I did all this myself for years and even if you have help you owe it to yourself and your future to learn how it all works.
In my studio, we always insist on advances on jobs, which helps with production expenses, but even then we are often only covering 75%. And if we are producing a portfolio, book project or new web site or whatever marketing we do, we are spending without direct compensation.
Having a P&L and a budget that allows you to plan and track these expenses is critical. Getting monthly aged Accounts Payables and Receivable reports are also essential. You can look out over the next month, quarter and year and estimate your fixed expenses, taxes and probably income based on past income and see where the spikes and valleys of cash flow will occur. Try to get all your regular vendors on account so you can pay for supplies net 30. Negotiate in advance with printers and others for better terms if possible to stretch out payments. Rearrange your credit card payments so they are not all at once but spread out in the month. I limit my credit cards to one Visa and an AMEX also, keeping it simple.
So you’ve done all that and every two weeks you go to pay the bills and perhaps you see there are more bills than cash. Ouch. You can hit your line of credit if you have one, take money from savings (never do this) or call your vendors and negotiate longer payment terms. Typically, what happens is most photographers end up spending every dime they have on overdue bills or just not paying some. That leads to bad credit, ruined relationships with vendors and just a lot more stress.
To get a better handle on assessing my bills and cash flow every two weeks I get a special spreadsheet report that combines my A/P with the balances from my various checking and reserve accounts, plus any income we truly expect will arrive within the next few days. This is broken out as “MUST PAYS” and which include ANY credit reporting item or crucial must pay business item such as credit cards, loans, health insurance and the like. By just sorting your bills like this you can really clarify things in a hurry. You just must pay anything that might send you to collection or for which a late payment will be reported to a credit agency. The one thing you must preserve as a small business is your credit.
I have a total column under MUST PAYS so I can eyeball quickly what that amount is and start thinking about what’s coming next. The next section is a snapshot of my Payables and it’s aged by under 30 days, over 30 up to 60 days, 90 days and longer. Sometimes this is important to have not because we are late on something but we are able to see long term balances that are slowly being paid off.
I then look at the total due for all the bills that are due now or overdue, combined with the MUST PAYS. I then look at the balance of our main business checking to see if we have enough or if we will have to transfer cash in to cover this amount. If we are tight, my next step is to scan the bills due now to see what is under $500 and make sure we pay those first. The smallest bills should always get paid quickest in my opinion, as those vendors need it most usually. Sometimes if we know a check is coming in a day or two we might cut and hold checks. And then if there is anything that we can extend by perhaps paying half now and half in two weeks. We then call that vendor to see if that’s ok with them.
This is another step in the process I’ve added that happens to work for me and my brain and the way I process information. It might not work for you and you might be way more organized and have a mind for numbers. If so, I’m very jealous but at least I have my system to fall back on. And if you’re like me, now you can too.