Tuesday, September 2, 2014

20 Financial Terms Every Studio Manager Should Know

Until we have comprehensive financial education, we'll never see the end of our booms and busts, Robert Kiyosaki

Managing a studio requires a set of skills and expertise in a variety of disciplines, (Oh yes! we have to wear many hats) one of which is financial literacy. Even when you are not running the full operation, you must have the financial knowledge that allows you to read and understand financial reports, get into a meeting with your finance team and be able to articulate at a professional level, adding value to the discussion. You must be able to interact (financially) with other departments and that requires a certain level of business acumen.

I've curated the list below with (in my personal opinion) the most widely used financial terms in the graphic studio business. We are already familiar with most of these terms, but I'm pretty sure this could help us to improve our financial literacy, hence making us more effective managers.
Accounts Payable
It's the money you owe to vendors and suppliers. Any pending invoices you have to pay for goods and services you have requested and received.

Accounts Receivable
It represents the money your clients owe you. You usually claim for it by the means of invoices, after delivering a service that your client has properly requested using a "Work Order" and a "Purchase Order." Accounts Receivable is only one of a series of transactions that are part of the processes involved in billing the client. It is legally enforceable if you follow standard business practices like estimating, getting estimate approvals, and requesting and receiving a purchase order.

It's an inspection done by an independent qualified personnel (outsiders) to a business financial statements to ensure the information represented is fair and true. The purpose of an audit is to provide an objective independent examination of the financial statements, which increase value and credibility to the way a studio is conducting its business affairs. An audit can be done internally and can also be requested by a client. It's a tedious process to go through, however, if the studio has been managed ethically and financially correct you should never be afraid of an audit.

Balance Sheet
It's the statement that summarizes the financial balances of your studio. In other words, it tells the financial position of your business at a determined point in time during a calendar year. The studio has its assets, owner's equity and liabilities, and like in any other business the equation remains the same: assets-liabilities=owner's equity.

A budget is the contemplated amount of money and/or resources to cover for a specific project, expenses, or activity. Budgeting is the best tool managers use to control expenses and resources.

In our context, it means the amount of charges posted on a specific project at a given moment in time, it could be the end of the job or still a work in progress. It reflects all the resources expended on a single job and managers have to be observant this amount never exceeds the (PO) purchase order amount.

It's an approximate calculation of the value of the services and/or goods requested by your clients. This is not a perfect science, however, experience will allow you to prepare more accurate estimates. Following historical data, using the proper billing codes and some common sense (ask questions when in doubt), will help a new manager to get on the right track while performing this important task.

The economic costs that a business incurs in order to obtain gains or revenue. Any outflows of money in return for goods or service are an expense. Whenever the studio purchases material to be used on a project, pays or submit a voucher for a cab ride, buys food for the studio artists working on a late night project, a business-related airline ticket, etc., these are all considered expenses. Usually, when authorized to do so, an employee can pay for an expense out their own pocket and then submit an expense report to be reimbursed later. Payments to suppliers/vendors and salary wages to employees are also considered expenses.

Financial Ratio
It's a quantitative analysis made by establishing a relation between 2 different values from the financial statements. Financial ratios are the tools used by financial managers to read and analyze financial statements. They indicate how the business is performing in a specific period of time, however, they're useless if you have nothing to compare this data with. You can compare it with past performances (historic data) and/or similar business performances. There are several categories of financial ratios, but in this list we're only covering one of the profitability ratios: Profit Margin.

It's the analysis you make to foresee how much you'll spend and how much revenue you'll capture in a specific period of time. It's based on the use of historical data, good assessment/management of your client's expectations, and controlling your expenses. As a matter of fact a good forecasting must start with the expenses.

It's a commercial document issued by the studio to the client after a project has been completed. It indicates the amount of money is owed to the issuer, specifications of the services rendered and the PO number backing up the work request. Invoices also have a unique reference number for tracking and security purposes. When the studio receives invoices from vendors and suppliers, these are considered purchase invoices.

After expenses and costs are covered in the price of the service you rendered or any goods you are selling, you add extra money to create the profit. This extra could be a fixed amount or a percentage of all the costs incurred in providing the service.

Operational Cost
Expenses associated with running a studio on a day-to-day basis are considered operational costs (see Expenses). For instance if you receive a request to print and bind 20 books and you purchase $200 dollars worth of paper, the $200 are considered an operational cost. However, if you only used half of the paper, then $100 is considered an expense while the rest go straight to your assets. This example illustrates the difference between cost and expense.

Any business expense not related to direct labor or direct materials that are billed directly to your clients. For instance, rent, utilities, insurance, etc. Overhead expenses have to be taken into consideration when determining or adjusting how much should be charged for the services offered by the studio.

When the total amount of revenue exceeds the expenses, costs and taxes needed to run the studio operation, it's considered a profit.

Profit and Loss Statement (P&L)
It's a financial statement that encapsulates the revenues, costs and expenses in a specific period of time (this could be a quarter or fiscal year). The "P&L" is perhaps the most important tool to help you see the big picture of the "ins and outs" and to put a "plug" in some of the holes to stop the outs. In other words you can easily see which costs and expenses can be cut in order to make the studio more profitable.

Profit Margin
It's the percentage of the revenue that turned into a profit. It's a profitability ratio that you calculate dividing your net profit by the revenue. The profit margin is key information used by financial management to do forecasting and to revise pricing.

Purchase Order
It's a commercial document issued by a client to the studio, indicating the specifications of the services requested. A Purchase Order is issued after the client agrees with the estimate submitted by the studio and until it is accepted, the transaction is not considered contractual. We also submit POs to our vendors and suppliers in order to control the studio purchasing and services requested to external entities.

It's the amount of money the studio receives for the services rendered and goods sold in a specific period of time. In an ideal scenario, the amount reflected on the invoices issued by the studio must equal the revenue.

It's the system used to record how much time studio artists spent on a particular job. Everyone knows what a timesheet is, but I'm including it in this list because in my personal opinion timesheets are the building blocks of the studio's financial structure. There's a reason why studio management is constantly enforcing the correct preparation of them, and CFOs and financial managers send email reminding employees to fill out their timesheets.Simply put, this is the way we bill the clients period.


Ernie Arias is an Advertising Studio Manager at Hogarth WW. Social Media enthusiast. Dad, husband. Opinions are my own.

References.: Wikipedia, Investopedia, Reuters financial glossary and Yahoo.