A production company's basic guide to accounting
Now that you're starting to see your production company grow, your cash flow and profitability have likely become more complicated and integral to your day-to-day operations. While trying to understand these metrics critical to your business's success, are you just confused by what your accountant is telling you? Use this cheat sheet for creative brains to understand accounting concepts and how they affect your business.
Profitability vs. cash flow
It's important for creative and service-based businesses to understand that cash flow and profitability are two different metrics. Consider this example: A production company takes out a business loan of $100,000, which lands in the company's bank account as cash. The company uses it to cover day-to-day expenses as well as larger investments or purchases, such as equipment and office space. However, although that $100,000 is in the bank, the company owes it back to the lender. In other words, it's augmenting the company's cash flow but isn't profit.
Now, consider this example: A company earns $50,000 per month from an agency client, but the client pays in arrears (i.e., after the services are performed). The company has earned the $50,000, but that cash isn't yet in the bank to use to perform the work. No matter how profitable a company is, it still needs cash flow to sustain operations.
WTF is a balance sheet?
When your accountant shows you your company's balance sheet, do your eyes glaze over? That's understandable—balance sheets can be intimidating, especially if you've learned that the key financial statement for a business is its income statement, or profit & loss (P&L) statement.
Your balance sheet actually tells you:
How profitable your business has been so far in the current fiscal year
How profitable your business has been overall for the entire time since its inception, which is the company's equity
What's owed to and owned by the company (i.e., assets) and what the company owes (i.e., liabilities)
A review of your balance sheet can reveal any errors. If you don't consistently review your balance sheet with your accountant while asking for elaboration on all of your accounts, you run the risk of undetected fraud or incorrect income statements.
Payables and receivables?
You can think of payables (i.e., accounts payable) and receivables (i.e., accounts receivable) as opposites. Payables are the bills your company needs to pay other vendors, and receivables are the invoices that your company needs to be paid as a vendor.
Your accounts payable and receivable are keys to understanding your company's overall financial position. If you have $100,000 in the bank and $99,000 in accounts payable coming due, you might need to strategize carefully around cash flow in the coming weeks. Conversely, if you have $1,000 in the bank but $99,000 in overdue accounts receivable, you're experiencing some short-term difficulty that will hopefully resolve itself in the coming days.
Understanding what your accounts payable and receivable look like, alongside upcoming expenses not reflected or upcoming revenues not yet billed, is key to managing your cash flow.
With the right accountant, you should be able to easily understand and deploy these concepts to develop your business strategy. If your accountant is just confusing you, dodging your questions, or avoiding discussions altogether, you might want to reach out to Syzygy. We'll happily provide input on how you can get what you need from your accounting team.