Creatives enjoy creating; ergo, there's nothing fun about money management. But budgets, cash flow forecasts and taxation are an essential part of every studio. If you don't do them, you could find yourself in a payment pickle which could lead to you being out of work.
Studios need to be able to do three different kinds of accounting. The first is day-to-day tactical income and payment management. You need a system in place that makes sure that everyone gets paid when they need to be paid, that VAT, corporate and employee taxes are all up to date, and that there are accurate records of income and expenditure. This is bread and butter bean counting, and it's not difficult to do.
Larger studios hire someone with book-keeping skills, buy them a PC with some accounting software, and leave them to it. Steve McKevitt is managing director of UK-based Golden. He explains how this works: "We have an accounts person. She does the books and payroll, with a Sage system we use in-house. Every time we get an invoice, she handles it. She also does the VAT and credit control. She contacts late payers with the usual seven-day letter after the 30-day payment period expires. After that it becomes a management issue, and we'll take people to County Court if we have to. But our T&Cs are clear, and we haven't needed to do that."
If your needs are more modest, you can pay an external accountant on a rolling contract. Expect to spend a few hundred to a few thousand pounds a year for a full service package. The sums aren't pocket money, but they're less than the cost of a trained full-time employee.
If you're a very small studio, it can be tempting to consider buying the software yourself. But the challenge is knowing what needs to be done, and when. You'll find you almost certainly need an accountant for both personal and corporate taxation anyway, and since you make your money from being creative, the ideal solution is one that distracts you as little as possible. Most solo creatives and small studios find that basic bookkeeping - booking income and expenses - is practical in-house, assuming there's some time to spare at least once a month. But the rest is best left to a professional.
At the mid-level, you'll need to consider project management accounting. This gives you per-project summaries and projections for new and ongoing work. Project management systems are designed to be flexible and easy to customise. It's important to use a system that is able to link with the everyday accounting tools you use. Otherwise you - or someone else on your team - will be wasting their time with duplicated work.
Ben Davies is managing director of Manchester-based The Neighbourhood. He explains how his company uses Cubic Interactive's Rapport: "Rapport monitors costs, hours and income for us. There's no perfect solution, but what sold us on Rapport was that it was customisable - we've been able to create our own reports to show how we're doing against our budgets - and it also works well with our Sage system."
Financial planning is a key part of money management, and smaller studios either don't understand why it's necessary, or don't have the staff or skills to do it properly. Management accounting, as it's sometimes known, means creating an overall annual game plan for a studio, and then checking it regularly to get an overview of the studio's financial health. As Davies says, "If you have an outline plan for the year, you can adapt before you get into trouble. Obviously it's easier to plan what you're going to spend than it is to know what's coming in. But like most studios a lot of our work is short-term and project-based. Having a budget means we can see where we are a couple of months ahead, and if there aren't enough enquiries coming in we can alter the PR to suit."
Steve McKevitt takes a wider view. "Great design isn't enough to run a business. It also takes planning and business management. At Golden, the creative director here doesn't need to worry about the numbers, because the board does the financial management together. He knows how to read management accounts, but the fact that we have a budget and a plan frees him up to do what he does best.
"I've worked with some big companies where the owner looks at the money in the account and makes a judgement on how well the business is doing. But all that tells you is how much cash there is, not how much cash there will be a week later. Even good cash flow can disguise a multitude of sins - for example, one studio I was involved with had loads of money in the bank. But there were massive overheads, and no money was coming in. So that didn't last long."
Davies explains that it's not all about the money. "We always evaluate the creative opportunity against the likely fee. We have four 'f' words: fun, future, fee and fit. We will do something that's fun and a good fit, and improves our future prospects, even if it doesn't pay well. It's not just about the cash. But at the same time, we plan and manage the cash flow so we know if we can do something like that, or if we need to concentrate on something that brings money in, in the short term."
The bottom line is that there is a bottom line. Even as a designer, you need to know what the bottom line is, and you need to have a handle on which way the graph is going. If you don't, your business can disappear from under you. But if you do, it's more likely to grow and succeed.
There are three main types of software you'll need to keep your financials on track. First off is a spreadsheet, used for general financial planning.
You can get by without one and it takes a while to learn the basics, but a spreadsheet is still the most flexible way to create what-if annual and monthly budgets, and to see how they change with different income and outgoings. Microsoft's Excel remains the industry standard, but OpenOffice is a good alternative.
For basic everyday accounting, you'll find the Sage suite used almost everywhere. Sage manages VAT, payroll PAYE (Pay As You Earn tax) and supplier payments, and can also book income and link directly to an online bank account to make electronic payments and print cheques. Prices begin at around £130 for a start-up level package, to very much more for larger businesses.
For management financials, you'll need a project management and accounting tool, which can estimate costs and income and compare the numbers with reality. These tools can also keep track of hours worked, and expenses for individuals and for the project as a whole.