by Kyle Buffo
We have entered the season of scrambling for records. Thousands of shoeboxes across the country make their way out for their seasonal use. Smudged gas receipts from last fall, receipts for reeds/strings, and payment records for the musicians you payed are all gathered from random drawers, instrument cases, car consoles, hard drives, and cloud servers.
You know there is a better way to keep records. The maxim “take good records throughout the year, it’ll make life easier during tax season” has been repeated enough times you start rolling your eyes before the sentence is half over.
If you haven’t been keeping great financial records all year round you are really missing out, and not just on deductions. Here is some inspiration to really formalize your record keeping and leverage that information to grow as a musician.
Whether you do your own taxes or hire an accountant, every year you have to do the tax document round up; 1099’s, expense reports, receipts, student loan docs, and many other forms. How stressful this process is and how confident you are about the numbers can be used as a gauge of the effectiveness of your current system.
Also, if you are operating as an independent contractor or driving revenue through other self-employed activities you will probably be filling quarterly tax returns to quadruple the fun.
This is where that maxim about keeping good records derives its purpose. The better your accounting process throughout the year the less stressful tax season will become. If you have a process already, step back and take another look at it. Especially if you haven’t done so in the last 5 years as the tools and apps available for very little to no cost can revolutionize your processes and dramatically decrease time spent on accounting and record keeping.
Analysis & Pro-Forma
Most musicians don’t fully utilize the power of having great records. Out of necessity they will have some sort of process for preparing for taxes, but then they stop there.
I strongly disagree with idea that the main purpose of keeping records is to satisfy the IRS and reduce your tax burden though business expenses. This is just one use collected data.
A musician should approach record keeping like a business.
If every Fortune 500 company no longer had to file taxes would they still spend thousands or millions of dollars to keep such meticulous records? Yes, 100% of them would. All the accountants and analysts aren’t just there to find ways to reduce their tax liability. By looking at standard financial reports like balance sheets, income statements, and cash flow statements combined with other data points, they can improve their business by finding hidden problems to fix and opportunities to grow.
The ability to analyze your business is a major benefit of having great records. You may have a gut feeling of where your money is coming from and going, but there is a no doubt that you will discover something you didn’t know when looking at your month to month reports. Where do you make the most money? Which gigs have the highest costs? Not all data is financial – how many people will you network with or how much you can grow your audience/email list by are factors in deciding your future path.
Going a step further would be using Pro-forma financial statements. Pro Forma statements are your projections for the next period you are analyzing. This could be income statements, balance sheets, or cash flow projections for the next few months to years. A great way to start is by using last year’s financial statements and adjusting them to account for changes you foresee for the next period.
Pro forma statements are extremely useful when trying to plan for your future, near term or long term. If you are wanting to improve your personal finances by attacking short or long term goals you can use your pro-forma statements to make better and more realistic goals, and make changes to your current spending habits to become more likely to reach those goals.
If you are wanting to grow as a solo musician or have a group or business idea you want to take to the next level, making a strategic financial plan is extremely crucial. Creating pro-forma statements is the best way to visualize how your financial strategy will work. You can see if you will have any cashflow issues over that time and know what your balance sheet would look like at the end of the next period. This is extremely beneficial in setting goals and expectations.
If it’s not a Process, it’s a Problem
I talked a bit about how wonderful it is to have all these great records and data. How do you get there?
“If it’s not a Process, it’s a problem.” It’s been stated in different ways, but the idea of creating a consistent and easily repeatable process is the best way to develop a system that meets your business goals, which here is keeping great records.
Brainstorm about all the data points you would want to collect. You need to track not just how much income, but when you got it, where it came from, and how much time you had to put in for it. Then develop a system on how and when you are going to track all of these. As I mentioned before, utilizing apps can help you develop simpler and faster processes.
Free apps like Shoeboxed can help with tracking physical and electronic receipts. Expense tracking can also be done by using fee apps like Mint or purchasing more robust accounting software like Zoho or QuickBook. I highly encourage doing your own research. If the process isn’t something you like, you won’t use it. Design a process you will like to use, whether it’s a series of apps or hand written notes (spoiler: the apps will make a faster process).
Creating and improving your financial process can help you save money, time, and help you find ways to meet your goals. What are you inspired to do? Look at your data, create your plan, and go after it!