A growing production company means that 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?
If your accountant is confusing you, dodging your questions, or avoiding discussions altogether, they’re likely taking advantage of the fact that your expertise lies in production, not accounting.
Production is more competitive than ever before and the demands required of your accountant have likely expanded beyond doing quarterly taxes. The current environment requires that creative brains learn a ton of new information outside their realm of expertise to stay afloat. Since that can feel like an overwhelming task, here’s a cheat sheet for understanding accounting concepts and how they affect your business.
It's important for creative and service-based businesses to understand that cash flow and profitability are two different metrics.
Consider this example: Production Company A 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: Production Company B 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.
When your accountant shows you your company's balance sheet, do your eyes glaze over? That's understandable—balance sheets can be intimidating. Here’s what your balance sheet actually tells you:
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.
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 accounts 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 accounts receivable look like, alongside upcoming expenses not reflected or upcoming revenues not yet billed, is key to managing your cash flow.
Deploying these concepts and using them to empower your business choices as a production company will allow you to step into managing the business end of things in a way that protects your creativity. It will ensure the financial future of your company with an empowered, informed business strategy.
In the end, balance sheets and production accounting are nothing to fear. They’re tools for keeping your production business afloat. It frees up your attention growing the company’s future.
Of course, a key part of any production company’s finances is payroll. Wrapbook has you covered with our practical guide to film payroll.
At Wrapbook, we pride ourselves on providing outstanding free resources to producers and their crews, but this post is for informational purposes only as of the date above. The content on our website is not intended to provide and should not be relied on for legal, accounting, or tax advice. You should consult with your own legal, accounting, or tax advisors to determine how this general information may apply to your specific circumstances.