How creative business owners can learn to stop worrying & love their cash, taxes, and advisors

Photo courtesy of Molly Quan

Photo courtesy of Molly Quan

By Liliya Jones

At Modernist, we think of creatives as the visionaries and change agents who can be found in almost any industry. They are the entrepreneurs, designers, writers, etc. who will build the next Google, design the next Nike Roshe, and write the next Game of Thrones.

Creatives, though they work in disparate fields, all share a higher likelihood of owning a business or being self-employed than the rest of the workforce. In our experience, these tactics for managing cash, taxes, and strategic planning can help successful (closely-held) businesses get to the next level.

Cash Rules Everything Around Me

Cash is Queen

Cash can make the difference between growing quickly and sustainably or sputtering out. But what does this mean for the creative entrepreneur?

Reading financial statements may seem like something you can just leave to your CFO and accountant, but there is nothing as empowering as understanding your cash flow. We’ve met many people (even financial professionals!) who mistakenly believed that the Net Income number on their P&L should equal the cash in their checking account. 

Tip 1 Learning to read your financial statements isn’t rocket science; try an online class to improve your skills. Then, to understand the amount of cash you should have in the bank, find your Net Income on the P&L and subtract any after-tax costs like shareholder distributions and principal debt payments you’ve made. You can find these numbers on the ever-helpful Cash Flow Statement.

Cash is Volatile, so Build a Big Reserve

Some creative industries, like advertising and entertainment, are cyclical. This means they go through boom and bust cycles, which are often correlated with the health of the overall economy. In contrast, defensive industries (groceries, utilities) tend to be more stable even when the rest of the economy is stumbling. It’s important to think about which category your organization belongs to and structure your cash flow accordingly.

If you find yourself in a cyclical industry, make sure to build substantial cash reserves during the boom years. That way, an economic crunch won’t spell the death of your organization, and may actually present an opportunity for strategic investments in your firm’s future. Our clients who came into the 2008 crisis with significant cash reserves were able to revamp their website, invest in business planning or buy commercial property on the cheap. And they entered the current boom cycle way ahead of their competition -- if their competition was still around.

Tip 2 Do some research and ask your mentors & entrepreneur role models about how the last recession impacted their business: how long were their sales slow, what investments did they make that paid off, what would they do differently in retrospect? Combine this information with your own strategic plan to start building a reserve that is big enough to float you through a similar crunch. On average, we recommend being ready for at least 6 months of slow sales, but the precise numbers could vary vastly based on your industry.

I.R.S. I love you

We’ve all heard the horror stories about business owners scrambling to get a credit line to cover a surprise $50K tax bill. As mentioned above, sufficient cash reserves will help you cover these unexpected-expecteds, but proactive tax planning could help you avoid them in the first place.

Tip 3 We suggest asking your CPA to meet with you, your CFO, and the rest of your financial team 2-3 times a year (July, October, and January work well). A couple weeks before the meeting, send them your financial statements and projected revenue for the rest of the year. Armed with this information, they should be able to work up a projection for your tax bill. They may advise you to make monthly/quarterly tax payments, change your business entity, start a retirement plan, or adjust your owner distributions or payroll structure, all of which can smooth out your cash flow and soften the blow come April. (And keep you on track for your retirement goals, too!)

Planning, the Gathering

Behind every high-profile business, there are numerous professional advisors helping it flourish - lawyers, bankers, insurance agents, CPAs, financial planners, and more. Since they’re all supposed to be looking out for your company, doesn’t it make sense that they should occasionally talk to each other?

Sometimes business concerns involve the expertise of more than one advisor - for example, a new loan will probably require help from your banker, insurance agent, CPA, and business lawyer. Additionally, involving multiple professionals in the decision-making, allows them to keep an eye on each other’s recommendations. (To see how valuable this can be, just ask Rihanna, who sued her accountant for poor advice that left her “effectively bankrupt” in 2009.)

Tip 4 We recommend getting the whole team together for group meetings at least annually, to hash out complex questions and brainstorm the financial implications of your strategic goals, especially the impact on your personal taxes and net worth. All of these professions involve tons of jargon, so we suggest mandating a “Plain English” rule to help you and the team stay on the same page.

There you have it, these are the practices that help our entrepreneur clients achieve their goals. Implement them, and they can make your creative business better, faster, stronger!