Trying to wrangle a creative business into a business plan is tons more difficult than I expected
May 19, 2009 4:09 AM   Subscribe

How am I supposed to make financial projections for a business plan when I don't even know how much money I'd earn in a month?

I'm in the process of starting up a small creative business aimed at providing services for creative productions & producers - anything from selling merchandise to stage managing to backup singing. From my experience, such people (basically anyone willing to do random grunt work that's necessary for a production to run) are quite in demand and it's something I enjoy doing anyway, so it's a viable idea. It's also going to be the brand/structure for my own performance/creative work.

I've already done a couple of gigs and am getting my name out there in the communities I want to work with. There are some grants and funding I'd like to explore, and they all require a business plan. However, I'm stuck at the financials section of the plan, because I don't know how to project my yearly cashflow or turnover.

The nature of my business means that my income is likely irregular, especially during the first year while I build my reputation. My potential income all depends on the people I work for, my level of experience, their budget, how friendly they are to me, whether they'd give me money or something in-kind, or so on. People tend to be really secretive about this as well.

I have an idea of a base hourly rate, based on previous work, but there's no telling how many of those hours I can fulfill. There's also the option of paid by commission, flat rates, many variables!

I asked a well-known accountant in the arts industry this question and he gave me this reply:
I tend to not worry too much about income projections, well not upfront anyway, because, as you say, you have bugger-all idea of how much you’ll make. Instead, I concentrate on getting the costs identified and quantified as well as you can, and even that’s a bit more guessing than anything else. Once I’ve established how much the business is likely to cost on a day-to-day basis, then that tells you how much income you need to cover costs. Add to that your cost of day-to-day living. That tells you how much money you need to be getting to live on and run the business, in total. Subtract from that how much you get, say, from part time wages, and the balance becomes the business income you need to get by one. That’s the starting point and if you think you can make more than that, then that’s the figure you use. Don’t get too hung up on income from a budgeting perspective though; generally you’ll hustle enough to get by on!
I do have an estimated budget of my costs, as well as calculations of how much I'd need from my jobs (not just this one, but regular jobs as well) to get by. However, it still doesn't help my business plan - I'm not sure I can replace the Financial Projections section with "My accountant told me not to bother"!

How do you plan for irregularity in business, particularly a creative one? What do you do when you can't predict exactly how much you'll earn, but you have a pretty good idea why that's the case and how you'll price yourself?

Also, are there any examples of creative and unusual business plans? I know of the Right Brain Business Plan but that's about it really.
posted by divabat to Work & Money (11 answers total) 14 users marked this as a favorite
How do you plan for irregularity in business, particularly a creative one? What do you do when you can't predict exactly how much you'll earn, but you have a pretty good idea why that's the case and how you'll price yourself?

Put those why's and how's into words and numbers. You indicate you already have ideas of how to price yourself, so all you have to do now is play pretend. Maybe it's one gig the first three months that pays by hour, and then one hour and one fixed price for the next month, or whatever. Typically what people want to see in a business plan is whether it makes sense and is viable. Be up front about the irregularity, and maybe make two or three different financial models for different scenarios.

It is critical to show how the irregularity affects your business. How long can the business survive between gigs? How do you plan to work around those irregularities to eventually become a profitable business?

Your accountant is basically saying, if you think you can make more than the what you came up with as a starting point then use that in your plan. So your plan may say something like: I need $x per month to cover all my expenses and make enough money for this to be a viable business. I will make $y per year, resulting in an average income of $z per month (which will have tremendous variance month to month due to the nature of the business). Layout how you think you can make $y per year, maybe with different scenarios. Your accountant's had a couple points, one being that as long as your average monthly income is greater than what you need, then don't worry. His other point was not to worry if what actually happens is different than what you projected (it's a given).

Good luck!
posted by forforf at 4:32 AM on May 19, 2009

You don't need to know exactly what you'll make. You need to describe, in a fair amount of detail, the business you hope to run. The system you describe has to seem plausible to the people you seek funding from, because nobody wants to flush their cash down the toilet.

My potential income all depends on the people I work for, my level of experience, their budget, how friendly they are to me, whether they'd give me money or something in-kind, or so on. is not going to fly, because this boils down to "give me some money and I'll spend it and we'll see what happens." Would you invest in somebody who said this? Come on, now.

You need to show these people how you expect it to work. The funding people can then examine your expectations and decide whether they seem reasonable, and whether they are in line with their own institutional missions. Once you're under way, your stated expectations can be compared to what actually happens, which will help you recognize the parts of the system that aren't working and need to be adjusted.

Again, correct figures aren't the point here. BELIEVABLE figures, hopefully backed up by some sort of evidence or experience, are the point.
posted by jon1270 at 4:40 AM on May 19, 2009

You pointed out that you're looking for grants, rather then loans, right? So the person isn't expecting to get paid back (I would imagine).

Just make up some numbers. Event though this stuff his highly variable. If you didn't think you could make enough money for this to actually be worth your time, it wouldn't be worth doing, right?

So figure out how much you need for it to be worth your time, and use that as your income estimate. You don't have to expect it to be a smooth, month by month income, you can average out what you expect to make over the year.
posted by delmoi at 5:42 AM on May 19, 2009

Your accountant makes some good points. It's pretty much impossible to project cash flows for a new business. Some people will argue that you should look to similar businesses to see what their cash flows are, but unless those other companies are public you would have no access to their financial statements.

So, in the absence of any sort of company to which you can compare yourself, I would say that you need to sum your anticipated costs on a quarterly basis and project a cash flow that will cover those expenses and give you a small profit. Example: Cost of goods sold = $100, operating expenses = $50, taxes = $10. Total costs for the quarter = $100 + $50 + $10 = $160. Project cash flow of $190 for the quarter, leaving you a profit after taxes of $190 - $160 = $30.

This is obviously a very simple example.

Further, any grant application you fill out should realize, or, rather, its staff should realize, that any projections you give are just that, projections. I wouldn't worry too much about how accurate they turn out to be; after all, you have not started a business before and so this is your first time trying to model it. However, that is not to say that you should forecast some absurd number; have a bunch of assumptions at the ready in case you are asked by the people reviewing your grant how you came up with your projected cash flows.
posted by dfriedman at 6:13 AM on May 19, 2009

I did a pro-forma profit & loss statement when I bought a business. On the income line, I put what I wanted to make, a reasonable amount. Then I worked backwards from that to see what kind of business I needed to generate to make that income. It was an extremely helpful exercise.
posted by theora55 at 6:20 AM on May 19, 2009 [1 favorite]

Your accountant is telling you to do a break-even analysis. Building a bit on what forforf said:

Say your expenses are $10 a month and you charge $5 per hour. That tells you, and your funding sources, that you need to work two hours in order to break even. You'll want to include variable costs and a livable wage for yourself since your funding sources will look askance on anything that suggests you don't need milk money.

Here's a neat tool that might help, it has spiffy little graphs you can include in your business plan. You can do this with hourly and flat-fee scenarios but I'd not worry too much about retainers. Good luck!
posted by txvtchick at 6:28 AM on May 19, 2009 [1 favorite]

You're worrying too much about the actual numbers - no one who looks at a pre-money (investment or income) business plan expects your incoming cash flow numbers to be accurate. They are looking for a realistic idea of expenses so they know you're not a complete nut.

I'd stay away from putting any barter or something-in-kind data in your financials. Instead treat these as if cash were involved.
posted by bitdamaged at 6:56 AM on May 19, 2009

You also might want to do best and worst case scenarios to give a bit of range to your projections. Just try not to be too overly outlandish for either one.
posted by rtimmel at 9:55 AM on May 19, 2009

Oh one other suggestion I've heard is to do more then one projection in this case, something of a worse case/best case scenario
posted by bitdamaged at 10:33 AM on May 19, 2009

I agree that you should treat any in-kind payments as if they were cash--just enter the cash value of whatever service or good you might receive as payment. I agree with others that the main point of the business plan, at least when you're looking for a grant, is to make clear that you're sensible and won't just burn their money.
posted by PatoPata at 11:48 AM on May 19, 2009

Develop a model based on lead management and conversion. Start with what you'll do to find contacts, get them into the pipeline, transition them along, and turn them into clients and repeat clients. Put in conversion rates along the way. Bingo, there's your model. And remember it's a model, not an assurance.
posted by acoutu at 1:10 PM on May 19, 2009

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