Ok, an important part of running your art business is to be able to understand your financial statements. You may get these statements from your accounting system, your accountant, bookkeeper or even on your phone! In this article I am going to take a look at one of the most basic yet most useful reports – the Income Statement.
What’s an income statement about?
The name Income Statement may be a bit misleading as this financial report covers not only income but expenses as well. Here is the basic idea behind the Income Statement: Sales (Revenues) minus Expenses equals Profit/Loss. If your Sales (Revenue) are greater than your expenses then you have a profit, if your expenses are greater than you Sales (Revenue) then you have a loss.
The first thing to note about the Income Statement is that it covers your financial activity for a period of time. Make sure you grasp this concept – “for a period of time”. The time period could be a month, a quarter, a year or any period you choose, even a day.
Your Income Statement could be as simple as three lines (Sales, Expenses, Profit/Loss) but this wouldn’t really tell you much other than whether you made a profit or not. More than likely your accounting software, accountant or bookkeeper will provide you with much more detail but it is extremely important you know what you are looking at. Where did the sales come from, was it original art, prints, or frames etc.? What made up the expenses, canvas, paint, labor, rent, electricity etc.? You use the Income Statement to review and manage your financial activity and make changes as needed.
Key parts of the Income Statement
This is the part of your income statement where you list the sources of revenue or sales. There are a lot of ways you can look at your sales, here a just a few:
- By type of art sold
- By how the customer paid – cash, credit card, financing
- By where the art was sold – online, gallery, fair or festival
Cost of Sales (Variable Costs)
In this section of the Income Statement the expenses associated with producing and marketing your art are listed. Take note that these expenses are not overhead and are a direct result of producing and selling your art – aka variable costs. It is important that you track and manage these expenses as it will help improve your bottom line and help you plan future projects.
Some of the items that go into the Cost of Sales section include:
- The cost of materials and supplies
- Labor costs – including your time as well
- The costs of going to a festival or art fair
- Exhibition costs
- Gallery costs
- Marketing costs
- Cost of goods purchased for resale
Gross profit is calculated by subtracting your Total Cost of Sales from your Total Revenue. Basically it tells you how much profit you made before deducting fixed expenses aka – General, Selling and Administrative Expenses.
General Selling and Administrative Expenses (Fixed Costs)
These are business expenses which are generally fixed and do not vary with your level or amount of sales. You can think of them as overhead. It is important that manage your fixed expenses as they may a large part of your overall expenses.
Some examples are:
- Utilities, phone, internet
- General advertising and marketing
- Wages and payroll expenses
- Office supplies
- Bank and other financial charges
Net Income (Profit/Loss)
Net income is what you made or lost in the time period covered by the Income Statement. It is simply calculated by subtracting your General, Selling and Administrative Expenses from your Gross Profit – keep an eye on your Net Income!
Why do I need an Income Statement and why should I care?
- You will need it to effectively manage your business.
- You will need an income statement to file your taxes.
- You will need an income statement if you apply for a bank loan whether it is based on your past financial results or projected results for a new business. The more financial savvy you are the better your chances of receiving financing.
- You need to track your performance by comparing one period i.e. 2014 with prior periods such as 2013 and 2012.
- Your income statement will allow you to see trends in your costs and the overall makeup of your sales so you can take advantage or corrective action if needed.
The bottom line(s)…
Ok, now you should have a good feel for one of the key financial statements – the Income Statement. First make sure that you are getting your Income Statements on a timely basis. For many of you an income statement is only a click away.
For others that are just starting out you may want to get the help of an accountant or bookkeeper to get your accounting reports set up. Pay attention to your Income Statement as it is one of the most powerful financial management tools at your disposal. And lastly, if you don’t understand something or think you need more detail ask for help – after all it is your business!
One more thing… I have an extensive section in my book about the financial and accounting things you need to know to successfully run your art business. You can find out more here: The Artist’s Business and Marketing ToolBox
Neil McKenzie is the author of The Artist’s Business and Marketing ToolBox – How to Start, Run and Market a Successful Arts or Creative Business available in softcover from Barnes & Noble and Amazon and as an eBook from iTunes, Amazon and Barnes & Noble. He has developed and teaches the course “Artrepreneurship” at the Center for Innovation at Metropolitan State University of Denver, and is also a visiting professor at University College at the University of Denver where he teaches “Marketing the Arts”.
Neil has over 30 years’ experience as a management consultant and marketing executive, working with some of the world’s top brands. Neil is a frequent lecturer to artists and arts organizations, a guest columnist for Colorado Biz Magazine, where he covers the creative sector of the economy, and the author of several articles for Americans for the Arts, a national arts organization. Follow Neil on Twitter: @neilmckenzphoto