Every dollar you make with your music is important — that's a given. But what you might not realize is that each dollar you spend to earn your music income is equally significant. Why? It's that five-letter word we all love to hate: taxes. Business expenses offset your income, thereby reducing what you pay in taxes. Failing to deduct a legitimate expense has the same financial impact as not getting paid, only you're throwing money away. In addition, if you don't have a working knowledge of your business finances, you won't know whether your endeavors are actually making money.
Therefore, you need a method for tracking all of your income and expenses as they relate to your musical pursuits. I'll show you how to set up and use a basic bookkeeping system to gain control of your finances and make tax preparation easier. (For an in-depth look at taxes, see “Working Musician: Tax Tips for Musicians” in the March 2003 EM.)
If your approach to dealing with your finances is to get a check, cash it, and spend, you need to rework your method into something more meaningful and useful. Bookkeeping is a detailed system for keeping track of where your money comes from and where it goes. To be effective, you need to learn to keep records, file receipts, and manage cash flow. The reward for your diligence is knowing how much you have earned, how much you have spent and on what, and whether you have anything left over. Maintaining an accurate picture of your financial situation helps you make better business decisions. Furthermore, you will have all the supporting documentation that Uncle Sam requires on April 15.
The simplest way to manage your music-business finances is to open a business checking account. Shop around, because the fees for these accounts vary widely. Paying even $10 or $15 per month adds up quickly.
Deposit all your business income into this checking account, and use it to pay all your business expenses. Record the reason for each expense in the memo section of each check. Since it's difficult to do business without a credit card, get one that is solely for your business. Pay your music credit-card bill with a check from your business account. Keep all your canceled checks and bank and credit-card statements in an accordion file that has ample sections for each month's activities.
FIG. 1: The above table shows most of the IRS Schedule C income and expense categories and codes that apply to music-related businesses. INCOME CATEGORIES
LSLive and session performancesSJComposing scores and jinglesPAProject studio audio-only productionPVProject studio video production and post-productionMSMusic CD salesBKBook salesOWOther writingESEquipment sales or rentalTLLessons and teaching
AAuto expensesBBusiness meals and entertainmentECost of equipment over $250FFees and commissions paid to vendorsGTravel expensesJPurchases on behalf of clients for resaleKGoods purchased for resaleLLegal and accounting feesMMusical equipment and suppliesOOffice suppliesPPrinting (paper and CD/DVDs)REquipment or studio rentalSPostage and shippingTTelephoneVAdvertisingXTaxes and licenses
This no-entry bookkeeping system is fine for the humble business. It is also a good way to start if you have no system in place. Unfortunately, it lacks the detail you need to monitor your income and control your expenses. The no-entry system also doesn't provide everything you need for filing your taxes. However, you can file the Schedule C-EZ form if you have less than $2,500 in expenses, have no employees, and don't claim a home-office deduction. There are a few other restrictions. (Visit the IRS Web site, www.irs.gov, for forms, schedules, and filing instructions.) Chances are that you'll need or want to use the regular Schedule C form, so the no-entry bookkeeping method won't cut it in the long run.
EASY BEAN COUNTING
You need to have a specific way to record all of your business financial transactions either on paper, in a spreadsheet, or with money-management software. But which transactions do you record and how?
There are five steps that are essential to keeping your books. First, categorize your income and expenses. Second, create and use a ledger to record each transaction. Third, start a filing system to manage the paperwork. Fourth, monitor your bills and income. And fifth, use the information you learn to run your business better.
Even as a kid, I kept track of my money. I recorded the sources of it (allowance, gifts, and so on) and where I spent it (comic books, candy, and such). As my finances became more complicated, this money diary matured into the system I use today. I now use a computer instead of a notebook, though.
How you divvy up everything depends on your situation and on how much detail you want. If you have several sources of income, you may want to track them separately. Because I compose, produce, record, teach, and write about music, sound, and video, I set up multiple, independent income categories. By spreading revenue across numerous accounts, you'll see which of your activities are the most profitable and which gigs either need a jump start or should be reconsidered.
Divide up your expenses by following the tax-deductible categories from IRS form Schedule C, Profit or Loss From Business, that apply to you. Fig. 1 shows the income and expense codes that will most likely apply to your music-related business. Chances are that you won't use every category every year. After many years in business, I've settled on several primary expense accounts. Some are subsets of the Schedule C categories that help me monitor certain expenditures more closely. At tax time, these individual accounts sum to just one Schedule C line. The two-letter income code and the one-letter expense code are for quickly recording the proper category in a money diary, ledger, or with software.
With your categories taken care of, toddle on down to your local office-supply warehouse. Purchase enough 6 × 9-inch envelopes so that you have one for every expense. Use these envelopes to file your receipts. I prefer to use envelopes rather than file folders because all those slips of paper fall out less easily. Also buy a one-inch three-ring binder, some blank paper, and a three-hole punch.
When you get back to your office, label each envelope with the tax year, an expense category, and its letter code. Use the binder as a money diary and for other financial paperwork, such as business account statements, invoices, and so on.
If you do your books on paper, draw lines on a few sheets to create a six-column ledger or purchase columnar bookkeeping sheets. Record your transaction details including date, activity, income or expense category, amount, and miles driven. You can set up a computer spreadsheet in a similar manner. Either way, it should look something like Fig. 2.
When you receive a payment, be careful to attribute the income to the correct revenue category. Make a copy of the check (or other income record), staple it to a copy of the invoice, and file it in your binder.
For expenses, record the transaction under the correct category. Write the expense code on the receipt and file it in the appropriate envelope. Keep all your paperwork for tax purposes, as it backs up your claims should you be audited.
Ultimately, you'll want to use dedicated software for this task. The look may differ, but the fundamentals remain the same. Whether you use Intuit Quicken or one of the Microsoft Money programs, you enter the date, the payee, the amount, and assign specific categories to each transaction. Include details in each transaction's memo section, too. You still need to keep and file those pesky receipts.
Software easily handles more sophisticated transactions, such as when you split expenses among several accounts. You can generate many informative reports, too. I use the monthly reports and often compare prior years to current year-to-date totals. Software tools usually include accounts receivable for recording money due and accounts payable for listing upcoming bills. The business editions of the popular programs even funnel expenses into the proper tax form categories, which makes filling out your taxes a snap.
The handwritten diary is still useful for recording business mileage, though, because the IRS demands evidence of mileage driven for business purposes. A few programs for handheld computers also record mileage.
You need to establish procedures for billing your clients. You can either bill your clients on delivery or invoice them with payment terms. Sometimes you get cash before delivery, such as when someone buys from your Web site and then you ship the product to them. Payment on delivery is best suited to direct sales (at a gig, for instance) or when delivering a single service, such as studio time to a client.
FIG. 2: You can easily draw up your own ledger or use purchased ledger sheets to keep detailed notes on your expenses, including miles driven for meetings or gigs. Date/Time Activity Cat. $ Amount Miles
11/27 - 1:00AAA video meeting4811/27 - 3:00Post office: Web ordersS(18.85)811/28AJF invoice #102603PA1762.4412/3Phone bill #123(78.17)12/4 - 3:00Office store: envelopes, paper, binder, and paper punchO(14.63)27
You'll often need to offer credit terms, especially when dealing with larger companies. The most common is net 30, meaning the total bill is due in one month. If a gig is substantially complex and will take a significant amount of time, consider creating a series of payments, such as one-third up front, one-third at a major milestone, and the final one-third on delivery.
Print your invoices on your letterhead with the word Invoice big and bold on top. Assign each invoice a unique number. I base mine on the date, for example “062403.” Itemize everything; the more details you include, the fewer clients will call with questions. Show exactly what each item or service was and what it cost. Make the total amount due big and bold and indicate your payment terms prominently. Mail invoices promptly and keep a copy of each one in the binder. For immediate sales, hand the invoice to your client so he or she can pay you.
Separate your paid invoices from the unpaid ones. That allows you to see who owes you money so you can call and remind them. Alternatively, use software to monitor unpaid invoices.
So flows the cash
One unfortunate downside to running your own business is the erratic income coupled with regular and sometimes unexpected expenses. Managing your cash flow becomes crucial; you must to stay on top of money owed to you and watch for out-of-control expenses. Keep a little extra money in your business account to help ride those ebbs and flows. No matter how hard you try, though, you may become strapped for cash occasionally.
I'm not a huge advocate of debt, and I prefer to buy items only when I have cash to pay for them. However, a credit card can be a useful and convenient short-term financial tool. There are many ways to use the power of credit to your advantage without getting mired in high-interest debt.
If, for example, you know your card's billing cycle, you can buy what you need after its closing date and have a whole billing cycle before you must send a check. This strategy works best when you have to buy items for clients and must wait for reimbursement.
Many companies offer “same-as-cash” deals, in which they charge you equal installments over time. Other incentives, including no-payment and no-interest deals for a few months, can make more expensive purchases easier to acquire. Be sure to pay off balances before the due date to avoid interest and other finance charges.
Last year I bought a new computer on one retailer's no-interest, 18-month plan. I've been sending in enough each month to pay it off before its due date and have saved nearly $500 in interest so far.
WHAT'S GOIN' ON?
Creating and maintaining a financial tracking system may sound like a lot of work, and at first it can take some time to get everything running well. I've been managing my finances with these methods for decades now and have never regretted the effort I've put in. Spend a little time each day or once a week to keep everything updated, and you'll be rewarded.
When you see your monthly and year-to-date income and expense totals, you'll always know how good business is or isn't. You'll see where you're overspending, so you can cut back. You'll see where you're wasting time on activities that bring little return. In short, having a handle on your finances gives you real insight into what you should and shouldn't be doing. You'll plan better and make more informed career decisions.
Jeffrey P. Fisher's latest book, Moneymaking Music, is a detailed guide to starting, growing, and sustaining your music-business career. Learn more about it and other resources atwww.jeffreypfisher.com.