Balance Sheets and Income Statements Made Easy!

Is there any better feeling than coming home to a clean house or apartment?  (Or is that just me?) Well, the same is true of your finances, especially those for your freelance business.  Just like with household chores, keeping your financials up to date is an easy task if you do it little bit at a time.  Also, like household chores, they can be made much easier if you have the right tools!  Washing dishes is a tedious chore, but a dishwasher makes having clean dishes a no-brainer and saves you a lot of time.

An Income Statement and a Balance sheet can add this same sort of ease to your freelance business.

First, let’s start with Income Statements.

An Income Statement (also called a Profit and Loss or P & L statement) is a financial statement that shows how revenue is transformed into net income.  Breaking it down without the fancy financial terms: it shows how the money you receive, minus your expenses, yields a certain amount.  Sounds simple?  It is!

• Our imaginary illustrator, Allan, gets $500 for a commission.  He spends $100 on materials.  His net income is $400.

Showing net income is useful to businesses because it gives you a benchmark of how you are doing each quarter, or maybe each month if you want to divide it up that way.  An income statement tracks revenue and expenses over a certain period of time.

If you don’t have a way of tracking what jobs are giving you money and what jobs are not, you are essentially giving up on ever making money.  Having this tool to compare where the money is coming from and when will help you decide what jobs are worthwhile for you to take, and when to say “No, thanks.”

Here is an example of an income statement for Allan:

The red indicates a loss, while the black indicates a gain or profit.  It looks like Allan did really well in January when he worked with the Museum, and not so great in February and pretty badly in March!  From this, Allan can quickly deduce that taking more jobs with the Museum is great for his business!

If you are limiting your Income Statement just to the business, be fair about what expenses are for your business and which are not.

You can take it to the next level!  Add in all your personal expenses (Dining, Entertainment, Transportation, Groceries… etc!), since you are the business.  That will give you a much clearer picture of what exactly you are pulling in each month.  Having trouble tracking your personal expenses?  There are free sites like Mint that will track them for you.

A little bit of monthly maintenance will keep your Income Statements in good order.

Still with me?  Good!  Then let’s move on to Balance Sheets.

A Balance Sheet is a bit different than an Income Statement for a few reasons.  One of those is that a whereas an Income Statement gives you a picture over time, the Balance Sheets tells you the “right now” of your financial picture.  Balance sheets also operate on a guiding principle.  That principle is:

• Assets = Liabilities + Equity

If you’re thinking “WTF?”, don’t worry.  It’s not complicated!  Assets are things you have of value- what you own.  Liabilities are your debts- what you owe, and Equity is the difference between the two- your net worth.

Avery simplified balance sheet for Allan might look something like this:

* Certain assets have a tendency to lose value, and you can write off their value over time.  Tangible assets depreciate, intangible assets (such as intellectual property) amortize.

We won’t get into how to categorize assets and liabilities, but this should give you the general idea of how a balance sheet works.  You can also take this to the next level and add in all your personal assets and liabilities.

As you set about updating your Income Statement, pop over into your Balance Sheet and update that, too!  They work best in tandem, and it’ll take you a fraction of your workday to keep it up to date.

You can find templates all over the internet for creating Income Statements and Balance Sheets.  I’ll be creating some google doc worksheets specifically aimed towards freelance artists that I will post up in the next couple of days.

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As always, feel free to email me with your questions and I will see if I’ve got a good answer!