If you are considering a business to make money from your art work or you are already making money but are considering expanding your current art business, analyzing financials for your planned business will help you make sound business decisions. The information here can be used to put together your own financials or can help you provide your accountant with the information needed to put together a useful financial statement. As a minimum, a certified public accountant (CPA) should review your financials statement preferably find a CPA that specializes in small businesses or better yet, operates a small business themselves.
Forecasting Sales: The first step in developing a useful financial statement is projecting your sales. This is market research rather than number crunching. The question you are trying to answer is
How much art can I reasonably be expected to sell in a month?
If your art has seasonal appeal, you may want to consider a timeframe longer than one month. A quarter is another commonly used financial-related timeframe. A timeframe any longer than six months is not really useful since many business expenses are on a monthly or quarterly basis.
How you record sales. Its helpful to think of sales in two parts. The first part is how many of each item you expect to sell (such as 6 inch vase, original oil painting, giclee print, and the second part is what is the price of each item? Your sales can be recorded in a spreadsheet on your computer or simply as a table on paper. Set up your spreadsheet or table with the art items you sell as rows down the left-hand side and the timeframe you are using as columns across the top.
Fill in the table with the dollar values of your forecasted sales for each item during each time period. Be sure to also record the price you used for each item (the top or bottom of the table is an appropriate place for this.) Total the sales for each time period in the final row.
Expense Budget: Use the same timeframe as you did for sales. Expenses include supplies, advertising, and operating expenses such as rent, utilities, and phone. Dont include payroll at this point. It will be addressed later. Be sure you have included enough supplies to create all the art you have listed in the sales table. Record your expenses when you will actually be paying for them. Dont record the expense of supplies for the same timeframe as the sale occurs if you only buy supplies twice a year or your art has a long lead time between when you start a piece and when it can be sold (examples, drying time for oil paintings or the time needed to fire and glaze pottery.) Also, include sales tax appropriate for your location. Total the expenses for each timeframe in the final row.
Analysis: Create a third table with initial profits (remember you have not looked at payroll yet) by subtracting expenses from sales using the totals for each time period. For those time periods where expenses are greater than sales your initial profits will be a negative number. Be sure to note the negative initial profits on the table. As an artist, it may be useful to graph some of your financial information. A bar chart with one color for expenses and a different color for sales will show you when you have more expenses than sales. Some spreadsheet programs will create bar graphs for you.
When are sales bigger than expenses? When are expenses bigger than sales? Does it vary a lot? Add all the numbers up on the third table if the total initial profits number is positive, you will be able to cover expenses over time. But if the bar chart shows months where expenses exceed sales (expense bar bigger than sales bar), you will need to have cash reserves to be sure the next months bills can be paid.
If the sum of the initial profits numbers is negative, you may want to re-think your business. You will need to increase sales. For sales to go up, either the price of the items sold or the number of items sold must increase. Be careful, if you make changes to sell more items, there will be increased expenses for supplies, sales taxes, and maybe advertising. Another option to increase sales is to include other items in sales such as teaching classes or speaking at functions for a fee. These are two sales items that may not result in a corresponding increase in your expenses.
Payroll: Once your initial profits are positive, you need to determine if the remainder is enough to pay you, any employees you have, AND the federal and state government. Determining the funds needed for payroll can be complicated. It’s good to consult an accountant when looking at payroll. Using the same timeframes as your other tables, create a table showing payroll costs. Be sure to include those additional payroll-related costs such as unemployment tax. A bar graph that will be useful is one with payroll costs in one color and the initial profits in another color.
These financials should not be used for any tax reporting purposes. Always consult with a CPA or qualified tax professional on matters related to legal reporting requirements. This method for financial analysis of your business will give you a sound basis for making decisions. Can you quit your day job? Do you need a loan to expand your business? Can you afford to hire an employee? Should you look for opportunities to teach classes? You will increase the likelihood of success of your art business by using detailed accurate financial information, such as described here, as part of your decision-making process.