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MAKE BOSS: ACCOUNTING FOR CREATIVE BUSINESSES


accounting for small business creative entrepeneurship

accounting for small business creative entrepeneurship

Of all the challenging things that come with running a business, the one that has given me the most headache and frustration is unquestionably the unalterable, inalienable reality that I must keep track of financial information. I’ve had a few private, pathetic tantrums, cried at least once on the phone with my accountant (let’s be honest – it was probably closer to thrice), and experimented with a stupid amount of systems before I found one that works for me. This from the woman who almost failed grade 9 math because she was too busy reading novels during class. If a numbers-dyslexic person like me can figure it out, so can you. You just need to find your system, along with a little practice and some patience with yourself when you’re trying to figure it all out. The brutal truth is that as much as this part sucks, it’s also really, really important. So if you want to be in business for yourself, you just have to deal with the fact that accounting is now a part of your life, whether you like it or not (this is something I have angrily whispered to myself on more than one occasion).

ACCOUNTING 101

Bare bones, brass tacks? This is what you need to be tracking.

  1. Sales. While this sounds obvious, make sure you’re clocking everything that comes in, especially if you have a diverse revenue stream. If you’re selling products, you should be able to monitor sales of each individual item so you can track what is selling and what isn’t. If you’re an invoice based business, you need to ensure that your customers are actually paying your fees on time, and that you’re capturing and recording those sales accurately.
  2. Cost of goods sold. If you create a product and keep an inventory, it is critical that you are keeping track of the cost of that inventory month by month.
  3. Expenses. These are costs not directly related to your product, but more widely include your general business expenses like rent, gas, phone, business insurance, professional fees, office supplies, etc.

Now, how to track this data? If you’re only working part time on your business, or your financial transactions are relatively simple, I think you can probably get away with using a robust series of spreadsheets to track your income. The first spreadsheet is called an Income Statement. It tracks your sales (both inventory and non-inventory) vs. your cost of goods sold (the actual price YOU pay for your inventory) vs. your expenses (rent, supplies, wages, etc etc.) It takes your sales and subtracts your cost of goods sold to get your Gross Profit. It then deducts all your expenses from the gross to generate your Net Profit. Here is an example using a generic business.

Income Statement spreadsheet

Hand in hand with your income statement, you’ll want to maintain a Cash Flow Statement. It tracks a lot of the same information as above, but what it’s truly looking at is how much money is coming in (inflows) vs. how much is going out (outflows) each month. While it is permissible to have months when you have more going out than in (for example, if you just purchased a lot of inventory), your total cash balance should always be positive. Meaning, you should always have enough money in your business account to cover your outflow needs. As you can see below, even though there are months where outflows are greater than inflows, the Closing Cash is always in the positive. This is what you want.

Cash Flow spreadsheet

Lastly, you’ll want to keep a Balance Sheet, which more or less summarizes all of the above information and gives you a snapshot of the health of your business at any given time. It’s a little tricky to put in my own words, so I’ll leave it to Wikipedia: “Another way to look at the balance sheet equation is that total assets equals liabilities plus owner’s equity. Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner’s money (owner’s or shareholders’ equity). Balance sheets are usually presented with assets in one section and liabilities and net worth in the other section with the two sections ‘balancing’.” You can read more about balance sheets here.

balance sheet

If you’re confused and want to punch me right now, I’m sorry. In apology, I’ve created a generic “Financial Business Statement” Excel template for you. It includes a linked Income Statement, Cash Flow and Balance Statement, all with formulas, so you should be able to plunk in your own data without a problem (this file will also open in Google Docs if you don’t have Excel).

All this said, if your business is tracking income from multiple sources, you need to send a lot of invoices, or the process feels in any way complicated or overwhelming to you, I highly suggest investing in an accounting program. Choosing the right software not only standardizes a pretty important part of your business, but it will also help you generate all the above reports and statements automatically. I have a lot to say about accounting programs since it seems like I have tried ALL of them, so stay tuned for a future post about choosing the right app for your business.

HIRING PROFESSIONALS

Every business, no matter how small, should be consulting with an accountant, even if it’s only once a year around tax-time. We can’t know everything, and even if your accountant is expensive, it will save you time and money down the road to have someone in your corner who can help you navigate the thornier elements of being a business owner, like taxes (collective groan), and when it’s time to start thinking about incorporating your business. If you REALLY hate accounting, and you have the money, you can also think about hiring a bookkeeper. Bookkeepers will likely charge a lower hourly rate than an accountant since they are not professionally certified and may not have gone to school specifically for accounting. They will help you input all your day to day transactions and make sure your books and accounts are in good working order. If you can’t find anyone locally (check references and get someone trustworthy!) there are also online services like Bench.co.

All that said, as my accountant told me this year, “At this stage in the game, no one should know more about your business than you”. Even though  accounting is my least favourite part of running this business that I love, I do like having a micro AND macro view of what I’m working towards. I feel like I am more conscious of my spending when I have to manually enter all my expenses, and I have a deeper understanding of what is going on in any given month because I am  entering all the numbers myself. I still have my accountant come in every few months to make sure the boat is on course, but it’s really satisfying to know that even though I blew it at grade 9 math, I can totally handle my financial game as an adult.

MORE ACCOUNTING TIPS

  1. Make a monthly appointment with your business to go over your financials. Don’t make excuses. This is an important date and it needs to be a part of your schedule and routine.
  2. Keep a task list to remind yourself what needs to get done each month. It should include: entering sales (either manually or automatically depending on your system), cataloging expenses, reconciling bank and credit card statements, sending and collecting on invoices, putting aside money for taxes, reviewing shipping costs vs. what you’re charging customers etc etc etc.
  3. Keep track of ALL of your expenses. This includes meals and drinks when you talk about business, trips that involve any networking or purchasing, and anything unique to your business. For example, I can write off things like shoes and make-up since I use them for photo-shoots. Talk to your accountant if you’re unsure about whether something counts, and write notes on all of your receipts in case you have to explain it down the road.
  4. Keep a separate business bank account. This is SO important. It is basically impossible to keep good books if all of your business stuff is mixed up with your personal. If your business is small-time or run under your own name, you can even use a low-fee personal account rather than spending money on ridiculous business banking rates. I use Tangerine in Canada which offers free chequing accounts (incidentally, they’ll give you a $50 bonus if you sign up with them using the key #41402663S1)
  5. In the same vein, keep a separate business credit card that you use just for expenses. This makes keeping track of expenses even easier since you can cross check everything against your statement and make sure you didn’t let anything slip past. I’m paying a small annual fee for an air miles card which will hopefully pay for a flight or two every year. Just make sure you just pay off your balance each month!
  6. If you’re not very good with keeping track of cash expenses, take photos of your receipts. Some cloud accounting software solutions have this functionality built into their apps. I use Evernote and love it.
  7. Learn the sales tax regulations for your state/province or country. You may have not have to register for regional or national taxes if your sales fall within an income limit. Since collecting and paying taxes is a pain in the butt, don’t start doing it until you have to. This is something to discuss with you accountant!
  8. Learn how to use Excel. It sounds so silly, but learning some basic formulas and how to link data from one sheet to another is insanely helpful. And weirdly fun once you get the hang of it.
  9. Set aside money for taxes every month. I try to sock away at least 30%, just so I don’t get screwed at tax time.
  10. Review your invoices each month to ensure they’re being paid on time. Keep in mind that late payments are basically a no-interest loan. Have a strategy in place for capturing late-paying clients.
  11. Keep that cash flow positive! If you’re in the red, it’s time to start reducing expenses or reevaluating your business. Do not go into personal debt to keep yourself a float if you can possibly avoid it.
  12. While it may be tempting to treat your business like a piggy-bank, it’s smart to pay yourself a reasonable monthly salary that is more or less consistent from month to month. If you’re making more than that, WONDERFUL! But if you’re smart you’ll make an effort to save or reinvest that money in your business since there is no guarantee or true stability when you’re self-employed. Have a safety net, whenever possible.

Whew. That’s a lot of ground to cover in one blog post but I hope some of you out there found it helpful! I’m finding these posts to be really helpful to me, since it’s forcing me to write down and quantify what I’ve learned over the last year. Any other tips or tricks you can suggest? I’d love to hear what your accounting rituals are.


This post is part of Make Boss, a new blog series exploring the day-to-day realities of creative entrepreneurship. If you liked this post, you may also enjoy Tips for Transitioning to Full-Time Creative.

  • Bunny

    Having run a family business for many years, let me offer a few suggestions . Invest in a One Write or Quick Books type of system. It will make life so much more easy. You can remake the wheel in Excel and you really should know excel to run your business, but these and other simple programs are out there for accounting. Big advantage? You just hand the disk to your accountant at the end of the year and they really are quite simple to use.

    Invest in a neat receipts program. This will scan and send all receipts to the appropriate file tax-wise. It is a huge life, time, and paper saver and the program is accepted by the IRS in the US. Check with your accountant if it is outside of the US.

    Be anal about keeping track of EVERY dime. You will see big surprises, often, as to what is selling, profit margins, etc. Bad tracking means you don’t know what your biz is doing. Watching the cash flow closely is important and the state of your business finances should never be a surprise.

    File all forms and taxes ON TIME. This is critical and in the US that is quarterly and regularly. Your accountant can teach you how to do this and it is easy. Don’t pay him for something you can easily do if just taught. Having done business in several states in the US, know that there can be county and city taxes that apply to your business as well as state and federal. It varies from state to state.

    Accountants are a must but have him teach you how to do things to keep his bill down. Don’t be afraid to negotiate his fee. There are various ways to come up with a price for his services. Don’t be afraid to shop around for your accountant.

    Make sure you pay yourself. If you cannot pay yourself a regular check something is seriously wrong and your business plan needs to be looked at. Once we got good handle on all this accounting stuff I decided to only pay myself once a year and that worked out really well.for us. It gave us an advantage at the end of the year when tax planning and was a great incentive to watch our pennies.

    Taxes need to be figured into the price of every item for sale and that money needs to come off the top before you pay anyone or for anything else. I would deduct the tax amount daily from our income and put it in a separate account just for taxes.

    What you say about having a separate checking account is critical, the separate credit card as well. Also have an account just to hold your tax in escrow. Any other method is considered “comingling” and besides being unprofessional itis begging for an audit. It is dangerous to comingle and the IRS does not look kindly on it. I do take issue with your suggestion to “Make a monthly appointment with your business to go over your financials”. Your funds really need to be monitored at the least weekly but preferably daily. Once a month is not any where near often enough, IMO. Expenses can get away from you too easily if that is the only time you are monitoring them. The list you give in #2 really should be dealt with daily and I am surprised it isn’t. For one thing it is not the big monthly deal but it also lets you know what is really happening with your business at any given time. Credit card and bank statements should be dealt with as they come in, not on a scheduled day once a month. Taking time every day to do the “business stuff” pays off. I guarantee, you will eventually dread that one day a month you’ve scheduled. What if it turns out something really fun and great is happening on that day? Do you not partake and then start growing resentment? Make it a daily habit to better manage your time. and lessen stress.

    Don’t think incorporation is only for the big guys. There are many advantages, taxwise and from a liability standpoint to being incorporated. I highly recommend and it won’t cost as much as you think.

    Always meet with your accountant in October/November with the years bookeeping. He can then advise you if you need to invest in capital improvements, inventory, whatever, before the tax year is over and what best and how much to spend.

    I know you reach an international audience. My experience pertains to the US and I hope it is helpful to those who live there. Being professional is critical to success, whether its a company like we owned or a pattern making company. The rules are pretty much the same no matter the business.

    All of this is said with the kindest and best of intentions, to help you in your business journey as well as others who may read. My husband and I ran a family business that did very well and morphed over the years as we were able to read the signs at any given moment and react as necessary. We had an accountant who taught us a lot and I love to help people who are starting out. I wish you the best in your business and much success. Good accounting is a large part of it, not the most fun part but probably the most necessary. Good luck and thanks for such a great, enlightening post.

    • AMAZING advice Bunny!! Thank you so much for sharing your wisdom. At this point I am finding the once a momth thing helpful since I don’t forget where i was or what I did last. I can just do it all in one shot. The last month I was working on it a little here and there each week and then I would get confused and not remember if I had included entries or not… My business is simple and low-income enough at this point where it feels reasonable… but I foresee a day where that will definitely change!

      re: incorporation…. it will probably happen next year. My accountant (who is AMAZING, and is teaching me stuff all the time) told me that it’s not advantageous yet to do so yet.

      Also, I completely agree about Quickbooks, but I know a lot of part time and micro businesses don’t have the money/time to invest yet. I used Excel for the first two years and it was fine since my busienss was dead simple. I’ll be writing a big ol’ Quick books/accounting post at some point so let me know if you have any suggestions to include. I’m still figuring it all out but I find it immensely reassuring to know everything is properly accounted for!

  • Suzanne

    Bunny, is there anything you don’t know? I’m constantly learning from you.

    • Bunny

      A Lot I don’t know but we ran a business in two different iterations for many years. I’ve learned the hard way. There’s nothing like getting a ten thousand dollar tax lien threat because the IRS lost your check payment proof in a building move. Even though I had the cashed check I had to go through hoop after hoop to get it straightened out. Meticulous bookeeping can really save your butt and it did in this case. You just never know what the next surprise is when you run a business and I’ve learned many lessons the hard way. You just can’t be too on top of these things. I really appreciate Heather’s post and she sets a great example to those who are starting out with selling patterns from the kitchen table. I think many of those new pdf makers will fall by the wayside as they realize how to really run their businesses. It is a real business and posts like Heather’s show the professionalism needed to succeed.

      • Thanks so much Bunny! It’s funny, if you asked me a few years ago if I’d like doing all this stuff, I’d probably yell HELL NO. But even when I hate accounting, I kind of love it too because its part of my business and I love my business. Like how you love your children even when they’re whining, I imagine. Also, so sorry to hear about that tax lien! That sounds like a nightmare. The absolute GALL of them to go after that money for their own mistake! From what I understand, I think the IRS is a little more ridiculous then Canada Revenue. I had to file in the US this year and couldn’t believe how stupidly byzantine and bureaucratic it was.

  • sj Kurtz

    I’m on board with the monthly. There will be a time when it’s a daily activity, but sometimes staring at your accounts when they haven’t changed can drive you crazy. Keeping those funds separate, THAT is key. And this is all good thinking

    • Bunny

      Staring at your accounts when they haven’t changed is a sign you need to react, not get depressed. Make it weekly if necessary. You need flexibility in business.

  • Linnie

    Thanks for this very detailed post. I find it extremely interesting. I´m loving this new series!!

    • Thanks Linnie! Glad not everyone is zzzzzzzing, haha

  • I was really bracing myself to read through this (expecting my head to hurt as hell). Only to realise that I’ve just done an exam on this. So good to see it applied by a independent entrepreneur though – makes it more ‘real’. And excellent spreadsheet!

    • Thanks love! I’m glad it wasn’t too scary. I found this process really frustrating when I got started so I was hoping to be able to break it down in a way that was less scary.

  • Carolyn

    I think this is great advice for anyone, whether you own a business or not. I’m a poor grad student living on a very tight budget, and I have no choice but to track every penny that goes in and out of my bank account just to make sure I can pay my rent every month. I do a lot of the things you mention: making and keeping a monthly appointment with my finances, using a series of linked Excel spreadsheets, putting aside money for quarterly taxes in advance, saving and categorizing ALL receipts, meticulously reviewing my credit card statements, and adjusting my spreadsheets each month as my expenses and income change. I absolutely hate accounting, but as you said, it’s critical, and you really can never be too on top of it. I like knowing where my finances stand and having the peace of mind that I’ll have enough money for that rent bill every month. It’s amazing what you can accomplish on a tight budget when you keep track of things closely and plan ahead. I’ve been doing this for 5 years and have never been late on any bills – phew!!

    • It sucks being broke. But it’s much easier when you’re SUPER smart about your money as you clearly are. Just think…. one day you’ll graduate and be making way more money and be in an awesome position where you’ll know how to deal with it and save it and not constantly be behind the 8 ball!

  • Super thorough overview, Heather! I always tell people accounting really has very little to do with actual math and is almost all about organization and consistency. I have a few extra tips, and I’ll add more if I think of them:
    -As an addition to #7, check with an accountant to see if there are any other forms of tax you’ll need to pay. For example, in Texas, we have to pay something called “Business Personal Property Tax”, in which you pay a tax on any property your business owns such as computers, furniture, supplies, and inventory on hand. If you carry a lot of inventory, you can end up paying a lot in taxes.
    -In addition to reconciling your credit card statements, make sure you are recording those purchases as expenses as well! I’ve seen people just subtract their cash from their account without accounting for the expenses in the appropriate categories. There are always two sides to every accounting transaction, and this is where accounting software can be really helpful because it makes sure you record both sides.
    -In regards to invoicing–if you invoice, you want to have a separate Asset account called “Accounts Receivable”. These are the amounts that you have invoiced customers for and that you are waiting for payment on. You wouldn’t want to record these against Cash at the time you make the sale, or else your bank statement won’t balance and you’ll see that you’re overstating cash on hand. Once you receive payment on an invoice, you’d then decrease your Accounts Receivable and would increase your Cash.
    -Along the same lines as the above, if you have liabilities that need to be paid at some point in the future, you’d want to record those in an Accounts Payable account, Loan Payable account, or similar, so you can see what your business truly owes at each point in time. So say someone invoices you for something, but it’s not due for 90 days. Like you mention in your post about past-due invoices, that’s basically a free loan to you for 90 days! You can recognize it on your books as a liability you’ll be paying in the near future so that you don’t end up overestimating your future caash, but you can keep the cash now to earn interest or use to grow your business or just maintain daily operations. When you pay the invoice, decrease cash and decrease the liability.
    -You are also very wise for getting business insurance, something some people think is not necessary for small businesses. You might think, it’s just sewing patterns, what could be risky about that? But think about if your PDF’s inadvertently had a virus that infected computers, or if the personal data and credit card information of your customers was leaked. You’d definitely want insurance!
    -I cannot agree enough with your suggestion about writing details on receipts right away. You might think you’ll remember later, but you won’t. Always write more detail than you think you need. I guarantee you will be happy to have it later.
    -Bunny mentions incorporation, but this is definitely something to discuss with an accountant, as it really will be different for everyone. A lot of the advantages can be lessened if you are a single person running a corporation. For example, you may not be able to avoid personal liability (usually a benefit for corporations) if you’re a one-man shop not that doesn’t follow corporate formalities like board meetings. (Although if you make it clear that personal and business funds are never commingled, that may be able to help you.) And depending on jurisdiction and your tax bracket, you may not gain any tax advantages.

    • a) I love you.
      b) I totally agree about accounts payable and receivable but I think this is more relevant when I start talking abut accounting programs. Which I will do in a week or two.
      c) That Texas tax is crazy. I though you Yankees were suppose to be all down with taxes and whatnot? Reminds me of the “Welcome Tax” you pay everytime you buy a house in Quebec. It can be $15,000-20,000!

      • Dude, a “welcome tax”?!?! That’s ridic! In the US you typically get huge deductions when you purchase a house… “The American Dream” and all… (I have no intention of buying a home so you can probably sense my bitterness, haha.)

  • I like YNAB as a tracker for personal finance, and it can be adapted for small business fairly easlity. (For example, I keep an ‘off budget’ account for money I’m owed – both reimbursements and the very small amount of consulting I do.) Doesn’t track receipts, but has an app that makes entering data on the go easy.

    Re point #7: It’s often worth registering for Canadian GST/HST if you sell to other businesses, even below the minimum thresholds. In this case, you get the GST/HST back on expenses, and it’s not actually an added expense for your customer. Of course, if you’re selling to individuals, tax registration increases your costs. I believe all of this is also true for Quebec’s QST, but not for other Canadian PSTs.

    (Also, I seem to recall there being something complicated going on with VAT for the EU starting this year, and which is relevant if you sell digitally from anywhere. Worth looking into if that applies to you.)

    • My accountant told me it’s not worth it to register for GST and QST yet so I’m not doing it. I’m trying to keep my admin burden to an absolute minimum 😉

      • From what I see, most of your sales are to individuals, so that’s probably a good plan. Otherwise your patterns would cost 5-15% more for Canadians depending on province, which would outweigh what you’d save.

        I had an HST registration at one point even though I wasn’t required to. However, I was only invoicing to businesses and usually in larger transactions so it wasn’t a big burden.

    • Also, I am taking care of the VAT thing which is a HUGE pain in the butt but has got to be done! I should write a post on that as well….

      • That would be good to see! Most of what I saw was in the knitting world, and I think a lot of knitting pattern designers just started limiting their sales to Ravelry and Craftsy (who I guess were taking care of the VAT thing).

  • GorgeousThings

    I would be VERY hesitant to recommend writing off expenses like makeup and shoes. That kind of accounting invites scrutiny from the IRS here in the US. If you are starting (or running) a business it is always best to ask a tax professional (not necessarily the same as an accountant) about which expenses can be written off and which can’t.

    • A few accountant types told me this was okay. I don’t write off everything, just stuff I use specifically for photo-shoots. I don’t hire stylists so I think it’s a fair trade-off.

      • GorgeousThings

        As long as it’s okay with the tax collection and auditing folks, then do it. But they don’t view “fair tradeoffs” the same way a lay person might, which is why I strongly suggest you consult with a tax attorney or tax preparer.

        • Hahaha now you’re making me paranoid! I’ll double check with some tax people, just to be safe.

          • GorgeousThings

            Always best to check with the people who know this stuff inside and out. I hate to see anyone have to pay fines!

    • Writing more stuff off does make you more likely to get audited- it’s happened to almost all of my actor and artist friends at some point in their careers. Where it gets tricky is that you need proof that these things were actually used for the business, so in Heather’s case, since they appear in photos published on her website, that’s much easier to prove than, say, clothes you wear onstage in a performance. But yeah, if you start writing off stuff like that, you’re almost guaranteed to get audited, at least in the U.S., so maintain careful records if you’re going to do it.

    • Bunny

      States can audit you as well, as happened to us in NY. Just something to be aware of. You don’t want to send up any red flags.

  • You might be planning to mention this in your next post, but if people are looking for a free accounting program, I really recommend Zoho. I use it for my freelancing business and it’s a pretty user-friendly way to enter expenses, invoices, payments, etc. I never played around with it too much, but it has some high-level functionality, and you’re not committed to a hefty price tag (although I think you can upgrade to premium if you want).

    I’m loving these posts, thanks for writing, and I can’t wait to see the next one!

    • I found another free one but I will look into zoho. Thanks for the tip!

  • Whew! I really admire you and anyone who can successfully run a small business! You’re convincing me to definitely keep me day job though!! (not that I was really considering a change, just daydreaming) Bravo to you for taking the leap and making it happen!

    • Thanks babe! It’s been a big learning curve, that’s for sure 😐

  • Seriously you are so amazing! It takes so much skill and work to just make patterns, but all the business stuff behind it too! Wow! I am overwhelmed just thinking about it. Thanks for sharing your tips and experiences!

  • Chie

    Such a great post! Thank you so much for sharing your knowledge. I hate doing my accounting every month. Beginning of this year, I wrote up a procedure, listing everything I do in a document. It helped me greatly mainstream everything I do in terms of accounting, and clarify my mind. Also if I hire help in the future, I can just give her/him the procedure since it’s already written down.

  • I love how your style of writing makes every topic enjoyable:) Keep up the great work xo Sophia