Thursday, October 11, 2012

Tips for Financing Your Music Organically

A key element of growing your music as a business, like any startup, is managing your money effectively. It's important to note that money management doesn't always mean financial prosperity is to follow, but you have to start somewhere.

This isn't an attempt to show you how to make more money, but rather an idea of what you should do once money comes. Assume for a moment you've been tracking your money diligently, recording revenue and expenses, and are left with your profit. Do you give yourself a nice paycheck? Do you split up the earnings with the band and treat yourselves?

A great rule of thumb for dealing with profit is the 1/3 1/3 1/3 Rule.* Here's what that means:

1/3 for Taxes
When tax season rolls around, you are going to want to have money set aside so you can pay your taxes without it being an even bigger headache. It is important to note that you will be taxed on this no matter how much cash you receive, even if you decide to keep profits in the business. As the owner (or part-owner if you are in a band), you pay taxes on your share of the profits, regardless of how much of it ends up in your personal bank account. By saving a third of your share, you are playing it safe and may end up pleasantly surprised with some leftover cash after taxes are paid.

1/3 for Growth
Face it, your band is a business and it needs cash to be able to grow. Sure, Kickstarter is great and may finance your next recording project, but what about miscellaneous expenses that pop up throughout the year? Or, even better, maybe you'll actually be able to self-finance your next project. Keep a third of your profits in the business (remember, as an owner you're still paying taxes on this money) and help your band grow.

1/3 for Debt Repayment (or better yet, for owners!)
This final third of your profits should go towards any debt repayment. Personally, I would never advocate a small artist taking any kind of bank loan, but maybe you owe your Aunt Frieda for that EP you recorded last year. Go ahead and pay her back, she's a nice lady. But, if you don't have debt (or have paid it all off) treat this third as your paycheck.

Now, I am no accountant and only mean this as a piece of advice for musicians wondering how they can get the most out of their money. That being said, make sure and spend some of it on a real accountant. It's a business expense, so it is a tax write-off, but better yet, they can help you make the best decisions with your money.

*This rule of thumb for organic financing in small business comes from Dr. Jeff Cornwall, entrepreneurial veteran and Jack C. Massey Chair in Entrepreneurship at Belmont University

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