I’d like to pick up where I left off with my Music Business Template and talk more in depth about how to prepare your financial statements. I’ve seen many new businesses write their entire plan first, then work the numbers last, wrong move. Once you have established the overall business model in your head, START with the Financial Statements. All of the words, goals and context that are in the rest of your plan should be dictated by how the numbers play out, not vice versa. What happens if your plan proves that you will not make a profit after three years, and the business will fold? I’ll tell you how to address this common mistake at the end of the post.
You don’t have to be a mathematician or an accountant to understand and prepare these statements. In fact, if you consider yourself an entrepreneur, you will make it your business to learn, create and monitor these four statements very closely. Below are the typical parts that should be included in your financial plan. Without these things you will not have a clear picture of how you will make money and the rest of your music business plan will be a waste of time.
Start Up Cost- Grab a pencil and a piece of paper. Divide it in half by drawing a line down the middle of the page. Label the first column, “Items”. Go on to write down everything that is necessary to get your business off of the ground. Examples can be, studio and band equipment, manufacturing costs associated with the products or service you intended to sell, initial marketing, promotion and distribution costs. Keep in mind that these may be recurring charges, but at this point, you should only calculate the amount you need before you release your first product or service offering. In the second column, write down the “Estimated Costs” associated with each “Item”. At the end, total up the second column and there you have your estimated start up costs.
Balance Sheet- This statement is broken down into three basic parts; Assets, Liabilities and Owners Equity. Write down cash in hand, equipment values and any money that is owed to your business in the Assets column. Next write down everything you owe (and I mean everything) in the column marked Liabilities. Subtract the liabilities column from the assets column and you get Owners Equity. The purpose of this statement is to see exactly how much you are worth today. Scary I know, but its necessary for future success in the music business.
Break Even Analysis- To determine exactly when you will become profitable, add up the total costs associated with creating your product or service. Include manufacturing, marketing, promotion and distribution costs to this figure. Then figure out how many units or hours you need to sell in order for it to equal your costs. The simple equation for Break Even is Total Cost = Total Revenue. [Sample] Tip: Use the total operating cost column in your projected income statement below to get your total cost. This way you will know exactly how many units you will need to sell to breakeven monthly, quarterly and yearly.
Projected Income Statement- This statement will help you forcast your sales and expenses 12 months in advance. An easy way to remember the components of this statement is the acronym U.S.A.I.I.R (as in US Air force with two I’s).
As you can see, based on these arbitraty yet attainable numbers, your music business is seeing a loss at the end of each month. What gives? Most business won’t see profits until the end of the third year. You can either reduce the cost of start up, increase your projected sales number or acquire outside funding.
“A common fatal mistake for many failed businesses is having insufficient operating funds. Business owners underestimate how much money is needed and they are forced to close before they even have had a fair chance to succeed. They also may have an unrealistic expectation of incoming revenues from sales.
It is imperative to ascertain how much money your business will require; not only the costs of starting, but the costs of staying in business. It is important to take into consideration that many businesses take a year or two to get going. This means you will need enough funds to cover all costs until sales can eventually pay for these costs.”
- excerpt Patricia Schaefer’s, “The Seven Pitfalls of Business Failure and How to Avoid Them”
So there you have it. I hope you’ve enjoyed my brief overview for creating your music business financial statements. If you have questions after reading any portion of this plan, please feel free to call me directly. My number is (347) 688-KEVE. Thanks again for reading and I look forward to hearing from you all very soon!