Note: This is the third in a six part series about business essentials that artists and crafters who run a business need to know. The series, “Going it Alone,” runs every two weeks. The first installment dealt with motivation and the second discussed taxes and record keeping.
One of the most important, if not the most important, aspect of owning and running a business is to know what is happening with your money. Unfortunately, this means that you are going to have to do some math.
Hold on! Stay with me! Yes, it is true that you are artists and the right side of your brain is dominant, and math may not come easy to you. That’s okay. The good news is that there is one formula you can use to keep track of your finances, and it isn’t very hard to use.
For this third part in our “Going It Alone” series, we’re going to go over an easy way for you to figure out your businesses financial situation.
A FEW DEFINITIONS FIRST
Before we get into the formulas, there are a few definitions you need to know first. There will be a test later, so make sure you know these words. (Alright, there isn’t really a test—we just wanted to make sure you were paying attention.)
Expenses: Costs that include advertising, rent, and everything else that’s involved in operating a business.
Net Income: The profit you make on the products you sell.
Revenue: Payments you receive for your products or services.
FINDING NET INCOME (PROFIT)
Businesses big and small need to keep track of how much of a profit they are making (or how much of a loss they need to worry about) with the products they sell or the services they provide. Finding how much money you made (or lost) during the course of your business is simple when you use the following formula:
Revenues – Expenses = Net Income
Here’s an example so you can see how this concept works. (Yes, I am aware that this blog post is starting to look like a math textbook, but stay with me—this will help you better run your business.)
Jane is a part-time artist who sells her paintings at art fairs and also teaches art classes to children in the community. During the past month she made $1,500 from selling her art at an art show and $500 from teaching her art classes. She spent $35 as a registration fee and $50 purchasing a tent for the event. She spent $75 on art supplies, $50 to rent the building for her art classes, and $60 for advertising her art class. In addition, she also spent $250 for the supplies she needed to create the art she sold at the event and had to pay $80 in quarterly taxes.
Now, let’s break the example down like this:
| Revenues | |
|---|---|
| Sales | $1,500 |
| Income from Services | $200 |
| Total Revenue | $1,700 |
| Expenses | |
| Registration Fee | $35 |
| Tent Purchase | $50 |
| Art Supplies | $325 ($75 for art classes and $250 for the art sold) |
| Rent | $50 |
| Advertising | $60 |
| Quarterly Taxes | $80 |
| Total Expenses | $600 |
| Net Income | $1,100 |
This means that Jane made $1,100 profit in the course of her business. If Jane isn’t happy with the profit she is making, she can either find additional sources of revenue (teach an additional class, for example) or decrease expenses (teach art classes in her home instead of spending $50 to rent the building).
Now, obviously this example is fairly simple and may not be even close to your own personal situation. But that’s ok. All you have to do is put this formula to use in your own situation.
Why would you use this formula? It helps you know exactly how much money you are bringing in and how much is going out the door. And of course there are many other financial formulas that are very helpful for your business that you can look up and use for your business situation.
