Pro Studio Basics

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Pro Studio Basics

10. Understanding Cashflow

The following advice is specific to Australia. Most Western countries have similar structures and the broad principles are similar. However, you should consult your own advisers for specific information. 

Photography studios can be profitable, yet still go out of business. How can this be?

The answer is cashflow. A photographer can be extremely busy, working seven days a week, but if he or she is too busy to send out invoices or to chase payment, money can quickly run out.

And when the money runs out, the rent can't be paid, equipment leases are missed and soon there are creditors clamouring on the studio doorstep or the sheriff is carting away your cameras.

Similarly, studios can find they spend more money than they are currently earning, using credit cards or generous supplier terms (pay in 30 days and stretch it to 60 or 90 days) to fund their aquisitions. This can't go on forever and eventually there is a cashflow shortage.

And then there's the downturn in the economy. The studio will run along perfectly as long as it's able to do ten or twenty jobs a month, but suddenly things change and the studio is only shooting four or five jobs. There isn't enough income to pay the expenses.

All these are examples of a cashflow crisis. The studio is earning money, but either it's not collecting it or it's spending more than it's making.

Cashflows And Budgets

Accountants and beancounters love cashflow projections and budgets to help a photography studio plan its income and expenditure.

Budgets and cashflows are very similar in design. A budget is a wish-list, a projection or a goal. It shows income and expenditure, month by month, as they are earned and incurred - but you might not have actually received in or paid out the money.

When you shoot a job, you earn money, but you mightn't be paid until the following month - or you might be paid a month or more in advance. What a cashflow does that a budget doesn't is estimate the flow of real money into and out of your bank account.

A cashflow statement does much the same as a budget, except it talks in terms of expected cash receipts and payments, not sales and purchases.

In this sample spreadsheet (click here) you can see the format of a typical cashflow statement. It has twelve columns, one for each month. Australian accountants like them to start in July, but they can start any time. And usually they go for 12 months because anything longer is more difficult to predict.

Information for the cashflow projection is produced from previous year's figures and your estimates of what you will do in the future. The format opposite is also greatly simplified - often it can include 10 to 50 more lines to list the different types of income and expenses.

Basic Format

At the top of each column is the bank balance - how much money is in the account (or how much is owed on your overdraft) at the beginning of the month.

To the opening bank balance, you add your income, subtract your expenses, and then add in and subtract other special items (such as buying equipment, paying taxes or lending money to the business).

At the bottom of the column, you add everything up to calculate the closing balance for your bank account. The closing balance for one month becomes the opening balance for the next month.

Cashflow statements like this are best done with a spreadsheet program like Microsoft Excel, but can be done manually as well. Use a pencil.

Predicting The Future

The idea behind a cashflow projection is to plan your expenditure. If you have a lot of money in the bank, it can be very tempting to spend it. A cashflow projection will show what will happen in the next twelve months if you spend this money now.

Many people believe that if there's money in the bank, they are free to spend it, but this is not the case. Let's take a simple example:

At the end of August, you have $10,000 in the bank and you want to buy a new digital camera that costs $9,000. If you buy it, it will leave just $1000 in the bank. However, your income tax return will be lodged in November and you have a payment of $7000 required.

A cashflow projection will show you if your business can generate enough money between August and November to pay the income tax. If it can, pay cash for the camera; if it can't you might borrow to buy the camera and pay it off over 12 months, or delay buying it until, say, January when you have saved up enough for both the camera and the tax. Both approaches would avert a cashflow crisis.

Better Than Nothing

Some business people don't believe in preparing cashflow projections because they claim they are never accurate. This is true, but they are missing the point. A cashflow (or budget) projection may never be accurate, but it isn't supposed to foretell the future, it's designed to help you deal with the future.

Many business owners stress about the future, wondering how they will make ends meet. Sitting down for half an hour and producing a budget or cashflow projection can help them do just that - work out how much income they need over the coming months to cover their overheads and produce a profit. With this knowledge they have a clear goal - and this in itself is usually enough to both motivate them and give them peace of mind.

The information in this article is general in nature and should not replace personal advice given by your own legal and financial advisers.

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