Why Financial Planning is Crucial for Creative Businesses

Many people think about creative businesses only in terms of their output, yet they need to worry about the same financial problems as everyone else. Financial planning in the creative industry can be even harder than in others. 

Depending on your current situation, clients, and workload, it’s essential to create proper long-term financial strategies. Financial planning can help your business improve it’s profits, as well as create a safety net for worst-case scenarios. 

This article explores the importance of finance for creative businesses, as well as some of the most important tips they need to consider. 

What differentiates creative businesses?

In essence, financial planning is the same for all businesses. It boils down to evaluating businesses’s finances and understanding your budget in order to make predictions on future income and asset values.

However, creative businesses are unique because their revenue streams aren’t always consistent. They might work extensively during a certain period and then have no projects for months. 

This makes preparing financially essential, as the circumstances can rapidly change. Challenges such as fluctuating income, client dependency, and project-based work are common for this type of business, and facing them is crucial. 

Financial planning for creative businesses explained

With key financial problems for this industry covered, we can move on to tackling them. The first step of the majority of financial plans should be the evaluation of the current situation. Alone or with the help of an accountant, take note of your revenue and expenses. 

The more data you have, the better plans you can make. The reason why I say this is because freelancers and project-dependant freelancers and agencies can have extremely good or bad months. 

For example, you can find a client that’ll pay you 5000$ for 2 weeks of work, and then you might struggle to find another client for months. The best way to address this is to analyze a longer time period, e.g., 6 months, and understand your average revenue.  

Once you have everything on paper, you should move on to setting short and long-term financial goals. This could be deciding what amount you want to save monthly in order to have a safety net once the periods without work come. 

Furthermore, financial goals can also include increasing your prices and finding more clients. By setting these goals, you can understand which business steps you want to take. If your financial plan includes finding more clients, then you must sit down and understand what’s keeping you from that. 

But, of course, handling your expenses is just as important as increasing your income. Get back to the sheet with your financial situation, and see whether there are some costs you can lower. For creative businesses, this can mean switching from proprietary to free open-source software or going remote. 

Important financial planning tips for creative businesses

You can find dozens of tips on finances, but we’ve created a list that makes the most impact. Each of these methods will work on its own, but combine them to create a better future for your business. 

Of course, it’s best that you first do a thorough audit of your finances in order to understand which of them will have the most benefits. 

1. AML procedures

Although creative businesses don’t handle the number of transactions that Fintech or e-commerce companies do, they can still become victims of money laundering. They need to ensure that the individuals they’re doing business with aren’t involved in illegal activities. 

One way to streamline this is through AML software. This type of tool allows transaction monitoring and background checks on individuals who are selling their art or services. 

Compliance with regulations, local and international, is crucial for protecting against fraudulent activities. While AML protocols don’t directly impact financial plans, they serve as a shield against problems caused by failing to comply. 

These problems can include:

• Fines,
• Legal problems,
• Bankruptcy, 
• Reputational damages

Each of these examples can cause problems with long-term financial goals, which makes AML procedures indeed essential for planning. 

2. Tax management

Like any other, creative businesses have tax obligations. However, the process can be more complicated due to multiple income streams and international clients. Proper tax management is crucial for financial planning.

Many creative professionals miss out on valuable tax deductions like:

• Software & tools: Design programs, editing software, and cloud storage.
• Equipment & supplies: Computers, cameras, drawing tablets, and office furniture.
• Home office costs: A percentage of rent, utilities, and internet expenses for employees and freelancers working from home.
• Marketing & advertising: Website hosting, domain fees, and paid promotions.

It’s best to proactively save for tax payments and forecast the height of taxes. Of course, not all businesses can save larger portions of their income at the time, but it’s worth considering. 

The best way to handle tax management is by collaborating with an accountant or a finance expert. Although this can be costly, it can pay off. 

3. Cash flow management

The most obvious cash flow advice is to find more high-paying clients. However, certain tweaks to your pricing system can be just as valuable. For example, you should require upfront payments, set clear payment terms, and charge fees for late payments.

For both personal and business finance plans, it’s essential to create an emergency fund. As a start, saving one month of crucial expenses is great, but it’s best to expand this budget to 3 to 6 months.

These funds should be kept in an accessible account, allowing you to quickly withdraw them and cover the necessary costs. Simple adjustments, like refining pricing structures and managing payments efficiently, can significantly improve cash flow — as highlighted in this cash flow management guide for creative businesses. Once the months of high-earning come by, you should focus on replenishing your emergency fund.

4. Analyze clients

Everyone who manages a business knows that clients aren’t made equal. Some offer higher amounts of money for less work, while others cause problems such as delays in payments and frequent complaints. 

You should always work towards a situation in which you don’t have to worry about cutting some clients off. Evaluation of your clients should include payment timelines and their reliability when it comes to projects.

If a client doesn’t provide you with a stable amount of projects over longer periods, it’s better to prepare in advance. The goal of all businesses should be finding clients that offer the right amount of pay for the time and resources you’ll have to invest. 

5. Find retained clients

The best way to solve your business’s financial struggles is to work on finding clients you’ll have on your retainer. They offer a lot more financial stability and predictability than one-time project clients.

Furthermore, the process of constantly finding new work can be tiresome. You’ll have to either take the time of your day to seek partnerships or have your employees do that work. 

Some benefits of financial planning for creatives

One of the key benefits businesses have from a financial plan is long-term stability. As mentioned earlier, this protects them during uncertain periods. An emergency fund, as a starter, can help them with unexpected costs. 

On the other hand, budgeting strategies can also provide them with the ability to allocate funds for both operational costs and future investments.

With structured finances, there are many growth opportunities as well. With sufficient capital, businesses can invest in new tools, software, or technology that will help them in their processes, such as these tools to streamline business operations.

However, one of the most notable benefits is they’ll be able to pick their clients wisely. In times without any income, many freelancers and companies get into business relationships only to keep floating. 

On the other hand, businesses that have the financial cushion can reject clients that don’t pay enough or offer a reliable opportunity. This understanding also opens the door to growth. Decision-makers will know when it’s the right time to hire employees, outsource work, or start passion projects.

When we think of investments, the first example that comes to our mind is IT companies. However, this is also important for this industry. It’s a lot easier to secure business loans, grants, or investor funding for creative projects with a clear financial plan. 

Financial planning ensures the long-term success of creative companies

Putting everything on paper won’t make your business skyrocket overnight. However, proper planning allows you to sleep better and have more stability and control over your company’s finances. 

The financial planning tips and methods can significantly help you build a business that not only has good revenue but also better longevity.