Finance 101 For The Live Audio Freelancer

Get the Freelance Finance Spreadsheet.

VIDEO TRANSCRIPT

If you're a live audio freelancer, and you're scared to talk about money. This video's for you. When I started out, I was simply look at my bank account if it was a positive number. And I saw a few invoices are coming in later this month. I was in good shape, but that's not enough to make sure you actually have cashflow.

That's gonna sustain you for the long haul. We all know production is seasonal January and December are dead. October is usually crazy. It seemed to make sure you have a forecast and know what's going on in your business and also have great data looking back to know to see if you're doing a good. Can do you actually know if you can give yourself a raise next year?

How much did you actually spend on expenses versus travel cost or cogs? So we're going to jump into all that today, especially for number phone book, I'm going to take it slow and go step-by-step through basic accounting and I've got a great spreadsheet for you to help you do. It's at produced by mkc.com/audio toolkit.

It's one of the many tools in there that is going to help you a lot. It's called the freelance finance spreadsheet, and we're going to jump into that today. Step-by-step and show exactly how I keep track of my finances and assess the financial health of my freelance audio business. So here we are in the big, fancy, scary spreadsheet.

So I know if you're new to accounting, this seems pretty overwhelming to look at all of these cells and numbers, but I'm going to walk you through. Step-by-step what it takes to put together a financial plan for the year. And we're going to see how that breaks down monthly. I'll give you a better data on how much work you actually need to do and how to control expenses and do all.

So you actually start on the right hand side and you set it up for the year. And then most of the time when you're reviewing it on a monthly basis and putting in numbers, you're going to go column by column here on the left, on left hand side. So if you follow me here over to column P we have. Basically our big financial accounts, we're going to be using to keep track of stuff.

As a spreadsheet says, this is fill out the orange cells in column Q first, and then we'll put in our tax rate and we'll get to that. So orange cells are inputs and blue are outputs. And of course, up here in neon blue, I have up here file, make a copy, and then you could edit this. So don't request access, cause I wanna keep the original in tax.

So you'd go up here to flat. Make a copy and then it's in your Google drive and you have it to edit. Okay. So gross revenue. So that is total amount of money. Coming in the door. This is almost always from invoices. You send to a client, a D D that you use to get paid for your work. So let's say there was a local nonprofit dinner that you ran sound for.

It was a full day. It's a common production metric, a full day or a half day that's 10 hours. And for me, a local full day. $500. So I would say thank you very much, client X, here's an invoice that says within 30 days pay me $500. So we will be square. So gross revenue is the total amount of invoices you think you could be able to send in a year to put, make that happen?

So this also includes, if you send an invoice to a client, let's say you traveled to a city, but they didn't pay for your plane ticket or your hotel upfront. And you had incurred that if you're going to get reimbursed for travel or hotel or food, or per diem, that kind of stuff, this would also be included in gross revenue.

Not all positive income or is it counts as revenue, but most of stuff that you're going to be encountering as an audit freelancer is going to be. So that was gross revenue, total money coming in the door for work. You did, or reimbursements for staff costs. You incurred on the client's behalf. So 60,000, if that was all day rates, that would have to be 60,000.

Divided by 500, that'd be 120 day rates to do any year to pull that number off. Okay. Next row is cogs. This is probably new to a lot of people cause usually think of just like income and expenses. So cogs is a different type of expense. So cogs it's costs of goods sold. So let's say if you were a t-shirt factory, it, this is the cost that makes too many.

A t-shirt. So the factory you're in itself, you're paying rent on that. That's an asset you own, but to be able to get the, the cotton and the machine to make it together, all the dyes, all that stuff, it, that is all costs associated with making this t-shirt. So let's say for every t-shirt you make, it costs you $3 to make it, then you're going to sell it.

For $10. So the cogs of that t-shirt is $3. So for us in audio world, most of the time, we're just selling your time. We were not a product based business. So you can basically translate this stuff. Cost of goods, sold cost of services sold. So what costs did you have to incur to make a specific job happen?

Most of the time we were just doing day, right? Eh, th those are those travel expenses you had to incur on your client's behalf in order to do a show. So I had to do a show in DC last year. I had to buy my plane ticket and book hotel upfront no big deal. I was able to do that. But that would be.

Cog in that I would not have had to book that hotel or buy that plane ticket unless I did that specific service. So that's not going to be an operating expense, which we'll get to later what I do to keep the expenses needed, to keep my business running. It is attached to a specific service that had to go do so that's.

Hogs. And we'll talk about why it's important when we talk about gross profit next. So most of the time for you, this is going to be travel costs. And a lot of times this is going to be reimbursed. So the t-shirt factory doesn't get directly reimbursed for the cogs. They just sell it from more than they made it.

Right. So a unprofitable or a business that's not making money means the t-shirt costs $3. The market only says they only sell for $1. Now they're in the hole. So you are able to bill your day rate and then also just get directly reimbursed for incurring those travel expenses. If the client isn't paying for it upfront.

So I keep that in cogs to keep accounting a little bit cleaner for me. I used to keep it at, in other expenses, but I've recently moved those up and it's made a big difference and we'll see why in gross profit here on P six. So. Profit means my gross revenue. So all money that came in the door minus my Cox.

And this is really helpful. I remember last year I did a lot of travel and it did have a, quite a few day rates. And I, I looked at the total month and the total amount of gross revenue for that month was like $12,000, which was a lot for me. And I was like, man, that's a really, really good month. But when I actually got.

Down. And I subtracted all the cogs. It was like I was traveling for a week and it had several plane tickets bounced around all over the place. That means that about three or three or 4,000 of it was just in those travel costs or those cogs. And so my gross profit was only about $9,000. So that's still a pretty good month, but it wasn't near, you know, that $12,000.

Mark. And so you can look at that top line and it's called typeline cause it's at the top that gross revenue and get skewed to see that big number. We have to know that like, Hey, I actually didn't make that money because I had to incur that cost of travel and then it's just getting reimbursed. So it's just a net zero at the end of the day.

Gross profit. Some people also refer to this as AGI adjusted, gross income. But I call it gross profit. And so a few that actually have an accounting degree and want to fact check me on this? Please leave a comment below. This is just what's making sense to me. So gross profit. So this is a really important number to keep in check as especially if you do a lot of travel gigs that this is what your actually billable rate is.

This is like the true amount of day rates. You're billing for not just actual travel costs. You're attacking on top of, but this growth gross revenue number. Let's say you do charge for travel days. That's still revenue coming in. That's not technically a day rate but that's still income. So you still put that at the top.

Cogs is what you have billed to the client. The cost of services sold and then gross profit is your gross revenue minus cogs. Okay. Moving on to op X, this is short for operating expenses. So these are different from cogs and that this is what takes the, keep the lights on, on your business. So typical operating expenses for audio freelancers.

B gear that you need for a show. This is gear you might use in every show I bought about a new Pelican last year. This is not a Cod cause I didn't buy it to accomplish a specific project for a specific client. It's just what I want to have on hand to help me have tools in the field and make mine.

Life easier, another operating expense I pay for Spotify so I can have access to all the music I need to in the field. I pay for a payroll software that helps take care of that for me, called Gusto. And it's great. I pay for Dropbox so I can share files freely pay for Google workspace now, so I can have.

Email and Google drive and all that stuff that you see here. So those type of expenses are just operational things that help the business run and grow. Okay. So that's operational expenses. So 6,000 is a little high for, for most people. But it just depends on the services that you need to keep the lights on and what's going on.

So next row is EBI T. This is earnings before interest and taxes. So this is your gross profit minus your operating expenses. So this is. What you have in the bank before you pay yourself and you pay taxes. So this is basically how much of a control do you have over expenses apart from yourself and paying people.

So some people have assistance or something helps out with that. So that's E B I T. The next is payroll. So this is how much you're paying yourself. So this is your. Not your true salary. Cause most people say, if you go to work for some other production company and they say, Hey, we're going to pay you 50 grand a year.

Then you're going to take taxes out of that. This is your some people like to call this, take home, pay. This is what's going to your personal checking account at the end of the month. So it's a good idea to pay yourself monthly out of this. So this would be $35,000 a year. And then your business on your behalf is going to take care of pulling out the taxes.

So I would have in your business, at least a business checking account and a business savings account, and then you have your own personal checking account. So at the very minimum, you can get a little bit more complicated if you want to, but I would start there. That's how I operate. So. Business checking is going to be where all your operational expenses are going off going from if you need to pay for a plane ticket, buy some new gear, whatever.

And that's also, we're going to pay yourself out of, so you're going to transfer it from your business, checking over to your personal checking. And then that savings account is where every month is where I would transfer. I would have two things going on. It would be simultaneously your emergency fund which I would have it.

Thousand dollars sitting in there just in case some gear breaks or you have a bad month and we're going to calculate that and a little bit later, so you can not have to be hand to mouth every time. So a thousand dollars is a great place to start. I would shoot to have at least next step would be three months of expenses.

Then maybe you give it, get all the way to six months of expenses just so you can get through those tough months. So that's your emergency. And then I would also, and just have that number in mind and then it will also transfer over the taxes every month that you're saving so on a monthly basis.

And that's what this column R is, as you put in these inputs, and that's going to tell you, what's that gonna look like monthly to pull it off so that if you. Bringing in this amount of gross revenue spending this mountain cogs and op ex, and then payroll is you're going to need to transfer over about a thousand dollars in taxes each month to keep up with that.

And so, and that's assuming you have a 25% tax rate taxes, as we know are super complicated. Depends. If you have state taxes how much is your spouse making? Do you have a spouse? Do you have any other tax deduction? Kids and all that. So it gets super, super complicated. So this is just a generic, pretty, pretty generous placeholder you're you're probably going to be in pretty good shape.

If you do at least 25%, for some of you, it's going to be closer to 20. Some, it might be around 30. It just depends on where you live. And I'm just talking about the U S tax system. If you're out of the country, good luck over you live somewhere else. But I think that's a good place to start. Because we're, again, I need to do, if you're not an LLC for just a sole proprietor, you're going to be needing to pay in taxes quarterly through th the your federal tax system.

That's the FTPs I think is what it's called as a 9 41 is that tax form you're going to pay estimated taxes. And so if you have a couple of years of data knowing here's about how much you make, you're going to pay 25% E B I T in taxes per year. If this all sounds super scary to you find a CPA, locally are aligned to help you with all this.

That's what I had to do. And so actually paid for a payroll service. Now that takes care of a lot of that that additionally have a CPA that helps me out with taxes at the end of the year. Okay. So now for that complicated tax talk, just know that you're going to need to set aside 25%. EBI T aside for taxes and pay that in quarterly.

Right. And then at the very bottom is net profit. So gross is meaning all or top-line net is what's left. Right. And so after. You know, all this money came in the door. I paid this for cogs and operating expenses. And then payroll, this is what's left in the business at the end of the day. So this is planning on having this short of cushion and not, you know, if we added this all to payroll, that would be 37 of a hundred.

That would mean a zero profit. You want a profitable business. You want to be able to grow and reinvest in things. So it's good to have profits, so don't take it all home and don't spend more than you got right now. So make sure you're keeping track of that and at least have some profit. And this is what's going to look like on a monthly basis to have all of that here for you.

Okay. So now let's plug that in into, what's going to look like on a monthly basis. So I've taken all these same numbers in our projections of what's going to look like monthly to pull that off and put it in here. I want to draw your attention to row 12 and this. Cue distribution that short and in my brain for quarterly distribution, I read a fantastic book by Michael McCalla X called profit first.

He thinks that you should always be profitable and that means managing your own paycheck and expenses really, really well. And I, I agree with them under the pandemic is like, you know, if there's not work to do how it can be profitable, there's ways to manage that. But one of the key things I took away from him is that.

Owner of your company should get a pat on the back for being profitable. So he's as every quarter, look at your total profit and then this formula I have going here says here's 50% of profit. And then go ahead and pay that to yourself. As the owner, as a pat on the back, that's a really great thing to do and an incentive to be profitable.

We'll be able to draw that out into your own personal. Bank account as a thank you. So that is what's going on there. Okay. So if we have this first month here, exactly as the rule book or the, this monthly target, we have breaks down. Let's say we have a bad month in February where we only have 2,500 in day rates.

And then we kept our cogs low since we didn't travel. So our gross profits, 2,500, but we still have. We, we cut some services we didn't need. So at 250 in OPEX or earnings before interest in taxes now are 2250, but I still need to pay myself 29 17 to make rent and pay for everything. That means we're in the whole 1230 for that month.

So we are not profitable at this point. And then on this column and we have for. Profit for what's going on is minus. So we were in the whole 1,021, which isn't great. But the good thing is, since you have an emergency fund, you are able to draw out of that and still make your own paycheck. So having everything line up where everything is exactly.

I needed to go on a monthly basis. Isn't good. So that's why it's important to have that cushion of emergency funds. So a thousand dollars, would it be able to not quite cover it, but get your super close. So you would only have to eat $21. But that's why it's great to have three to six months of expenses.

But the great thing is, let's say in March, you had a fantastic month. So you had a ton of day rates and you're able to do. 8,000 in revenue. So that's 8,000 divided by 500 that's 16 day rates, which again, 16 out of 30 days a month. Isn't crazy. So that's very doable. Yeah. To travel a little bit. So let's call that seven 50 in cogs operating expenses.

You still eliminate a specific to Nissan, which is two 50 and you still took home 29, 17. You're not getting big eyes seeing you just made a whole bunch of money. You're keeping a consistent paycheck. And then you had a really profitable month, which is great. So that's $2,333, and now you're profitable for the quarter and go head and give yourself a pat on the back and you get $656 out of that.

And you are total in the black $1,312 for. So, this is a great way to keep going every month putting in these numbers. And it's great to have some sort of accounting software working alongside you like QuickBooks or FreshBooks or wave, whatever you want to use to be able to categorize these transactions.

But this always helps me give a big picture view of what's going. And am I, am I profitable? And we spending a whole lot in travel. I can always look at my cogs and then go back to the invoices I sent in. Like, am I actually did actually get paid back for all those travel expenses that I submitted.

Again, cogs doesn't always mean travel expenses. It's just what it means for me. A lot of times, as a freelancer, who's traveling and mixing. So all this is all making sense to you. We stepped through a lot of information. This is a whole lot of accounting terms, but I please go get this [email protected] slash audio toolkit.

Also got a link for you below. Their spreadsheets and stuff on E Q and console presets. Please go check that out. My name is Michael Curtis. I love helping you sound better and build a career at audio. And no one seems to like to talk about money. So I want to talk about that here and show you how I think about finance for my own business.

And I want to let you know below you let me know below a Y has been tripping. The most with money in your freelance business, is it figuring out how to forecast our, is there just simply not enough coming in the door, you're just feeling really not hopeful about building a career in audio. Are you not sure about taxes or how much to set aside, please let me know below.

I would love to hear from you and I'll catch you in the next one. Thanks.