Using Financial Ratios

Using Financial Ratios

Financial Ratios provide you with a quick and simple way of looking at your financial position. Composed of a few simple pieces of information and some math, these ratios may be useful when determining loan eligibility, protection against a financial crisis or your current debt ratio.

Ratio

What You’ll Need

When You Should Use It

Formula

Current Ratio Current Assets

Current Liabilities

Use this when you need to demonstrate your ability to quickly pay for your liabilities for the year. Creditors typically look for a higher percentage of assets. Current Assets/
Current Liabilities
Quick Ratio Cash

Accounts Receivable

Notes

Similar to the current ratio, use this to demonstrate your ability to quickly pay off or invest in something. This doesn’t include your inventory or the work you are planning to sell. In this case we are looking primarily at yourcurrent cash. (Current Assets -Inventory)/
Current Liabilities
Debt Ratio Total Debt Amount

Total Assets

This ratio focuses on your long-term debt (mortgages, student loans, etc). Lenders look for a smaller ratio when deciding on giving you a loan. Total Debt/ Total Assets
Gross Profit Margin Total Sales

Cost of Goods Sold

This ratio will demonstrate how much you made on the sale of your work after you figure in the costs associated with creating it. (Total Sales-Cost of Goods Sold) / Total Sales


Financial Management Tools

Financial Management Tools

Having some simple financial management tools can help you achieve greater control over your creative practice. The tools outlined here will help you to reflect on the money you currently have, how you are using your money, and how you could leverage your money in different ways.

Budget (Looking at the Future)

The budget or spending plan will assist you in managing your money. A budget is designed to estimate what you may spend over a period of time. To keep things simple start out with a monthly budget. Based on your income and expenses, you can estimate what you may receive and what you may spend in the next month. Although you may not be spot on your first month, your estimates should become more accurate as time goes on.

There are a number of ways to organize your budget. Putting together a basic document designating one column as the category, and the next, the amount budgeted for that category is a good way to start. Be sure to keep your categories fairly broad so that using this tool doesn’t become a burden. You may start with the categories you listed previously. Another way to think about your expense categories is to consider your reasons for the expense (in other words, is it for research and planning, development and creation or marketing and distribution?). If you are feeling tech-savvy, you might try using a program such as QuickBooks or Expensify to set up the budget. There are also many free options available including some great apps for your computer, tablet or smartphone.

Once you have created and finalized your budget, you can either keep it as a reference or use it as a working document. You may want to keep a tally of your actual expenses in a separate file and compare it against your budget. Alternately, you may update your budget as you spend more money in one category and less in another. Either way you should keep a copy of the original budget you developed for yourself. Use it as a building block and measurement tool for determining how close you came to your original goal.

Balance Sheet (A Snapshot)

Assets – Liabilities = Equity

A balance sheet, also known as a statement of position, allows you to see your current financial state in a very simple way. More or less, this sheet is a snapshot of your cash and other assets taken at asingle point in time.  This sheet first lists all of your current assets in total, including both the tangible (cash, supplies, structures, land, physical artworks, etc.) and intangible (copyrights, patents, brand name, contracts for commissions not yet realized, etc.). From that total you can subtract your liabilities or the debt that you owe on those assets.  By doing this you will see your equity, or how much you and/or any investors truly own of your current business assets

Cash Flow Statement (Your Transactions)

A cash flow statement is designed to allow you to see the amount of cash coming in from your work and the cash being expended.  Unlike the balance sheet, this statement takes a look at your financial transactionsover a period of time. It records your operating activities (profit from product/service sale, costs of shipping your work, etc.), your investment activities (mortgage payment, purchasing equipment or materials, etc.) and finance activities.

A cash flow statement calculates your ability to cover immediate expenses. With craft and visual arts businesses you may have incredible assets and equipment but payment for a finished work may come all at once. Likewise, a performing venue or recording studio may have cash tied up in rental space while its revenue stream is dependent on ticket sales, album sales or artist contracts. A cash flow statement can help you visualize, schedule and manage for this unsteady flow of finances no matter your discipline. In addition, potential lenders or investors may be very interested in reviewing this statement.


Understanding Your Current Finances

Understanding Your Current Finances

Income Statement

Having a clear picture about your current finances is the first step to better financial management. The best way to approach this is to create a few lists. These lists illustrate two financial streams. The first is your income, money that is coming to you over a period of time; the second is your expenses, money that you invest into your work or spend on living expenses.

Income

Whether you are currently supporting yourself through your work, a secondary job, or through another source, it is best to account for all income that you receive annually. You may need to average your annual income as seasonal factors may contribute to the amount of money you make throughout the year.  While the summer or holiday season may offer a host of festivals, performances or sales, your income may drop significantly during other times of the year. Calculate and average these ebbs and flows for your annual statement. You may already have an intuitive sense of this as you supplement the development of your work during off-seasons. Developing a more structured understanding of these trends will be helpful as you examine your expenses, debt repayment, professional development opportunities, and inventory.

Possible Income Categories

  • Annual revenue from your work. If you have different types of income from your work you may consider separating them into their own categories for example performances, profit from sales of your work, royalties, etc.
  • Annual revenue from teaching others about your craft such as workshops, presentations, programs, etc.
  • Annual salary or wages
  • Grants, fellowships, residencies, etc.
  • Additional income such as gifts, investments, etc.

Expenses

Begin by categorizing your annual expenses and separating work and personal expenditures. If you are not able to separate them completely, for instance, if your studio is in your home and you cannot delineate utility bills, consider instead adding a section for shared expenses.

Possible Annual Expense Categories

  • Contractors or professional services
  • Payments on debt (student loans, car loans, credit card etc.)
  • Education and training
  • Food and beverage
  • Insurance
  • Marketing and communications
  • Memberships, subscriptions and books
  • Postage and mailings
  • Retirement
  • Salaries and wages to and apprentice, employee or intern
  • Space (rent and/or mortgage payments and improvements or modifications)
  • Supplies and Equipment
  • Taxes and other government payments
  • Travel
  • Utilities
  • Other yearly expenses

Constructing Your Income Statement

By creating lists of your income and expenses you can start to see the structure of your income statement. This is a statement ofyour net profit or loss. To finalize this statement, total your income and expenses and apply the formula:

Income – Expenses = Net Profit/Net Loss

Additional Financial Streams

In addition to income and expenses, you should create two additional lists: one to outline all of your current savings (savings accounts, CD’s, investments, etc.), and for your total debt beyond your annual payments. This will give you a better overall picture of your current and long-term finances. By listing savings you will gain a better sense of the current cash that you have on hand and how accessible it may be. Understanding your total debt will show you how much of that available cash may be tied up proportionately. Use this information to set additional financial goals and to create a balance sheet.


Commissions

Commissions

Commissions from arts, cultural and state arts funding organizations

Another way for artists to receive financial support is by actively applying for the commissioning of new artwork. Artists may be selected to participate in commissioned art projects on a local, state, regional and national level. Sometimes these projects are administered by local arts and cultural organizations around a specific need or community event. Other times the commissions are part of an organization’s annual programming:

  • A visual artist may be selected to design and lead a hands-on community mural project in collaboration with a local city school on a topic of current interest.
  • A landscape artist may be commissioned to help design a healing garden as part of collaboration between a city hospital outreach program and local greenhouse nursery.
  • A composer may be selected to write a new work for an organization’s Centennial anniversary.

Commissions are an effective way for artists to receive funds directly to create a new work or body of work in partnership with a sponsoring organization. Most often these commissions use a process for selection that is centered on a juried review or curated selection process. Artists are asked to submit proposal and work samples that become part of the review process. Occasionally, in the case of large-scale sculpture commissions, finalists may also be selected to create models of proposed work and visit sites for location as part of the final selection process.

To find out more about organizations in your community that might offer artists commissions visit CPAC’s Creative Compass calls for artists listings for upcoming opportunities.

There are also Percent for Arts programs administered by state arts councils and funding organizations like the Ohio Arts Council that engage artists directly by notifying them of upcoming commission deadlines for specific projects and commissions. For example, a sculptor may be commissioned to design and create a new work for the interior atrium space of a university science building.

Learn more about networking opportunities and art commissions in your community and state-wide:

  • View calls for artists
  • Visit our event calendar
  • Sign up for email blasts and announcements at your local arts and cultural organization websites
  • Become a member of local artist service organizations
  • “Like” or “follow” arts and cultural organization’s social media pages and blogs

Research specific programs like the Ohio Arts Council Percent for Art Program, review the legislation and guidelines and receive commission notices for upcoming projects.


About Fiscal Sponsorships

Fiscal Sponsorships

Fiscal sponsorships are another way for artists to receive funding indirectly. Artists apply for grants through an incorporated nonprofit art, cultural or similar organization.

By definition, a fiscal sponsorship is a partnership in which a recognized 501(c)3 nonprofit organization provides agreed upon financial and management assistance to an individual artists for artwork created.

In a fiscal sponsorship, the artist is not the direct recipient of funds but is the beneficiary of those funds. The nonprofit fiscal agent organization receives funds directly from another source – most often a foundation, corporation or nonprofit funding organization that cannot make grants to individual artists directly for legal or other reasons. What this means is that the fiscal agent would pay vendors, artist assistants or any person or organization involved directly in the creation of your work.

Choosing a Partner

If you decide that a fiscal sponsorship will be a good fit for your specific funding need, make sure you choose the partnership organization wisely. Start with organizations with which you currently have an existing relationship or have been professionally affiliated. When researching a nonprofit organization to partner with for a fiscal sponsorship it is important to consider a few key issues:

  • Does the organization have a demonstrated history of working with individual artists successfully on projects as a fiscal agent?
  • Does the organization have the financial stability and staff resources required to take on a fiscal agent project at this time?
  • Will the organization take a percentage fee for acting a fiscal agent for your project? (Most organizations depending on the amount of time needed to manage funds and disburse checks will charge a fiscal agent fee of 10 – 15% to come out of any funds received for your project).
  • Does the organization have a fiscal sponsorship or fiscal agent contract that clearly delineates the roles and responsibility for both the artists and the sponsoring organization?

Your approach to the organization should be professional and business-like in making your case for fiscal sponsorship. Be sure to present an overview of your art project, and include a proposed budget and timeline.


Government Support

Government Support

Several opportunities exist in Ohio for individual artists to receive public funding directly from government agencies, departments and designated non-profit organizations. Grants made to artists from public funding sources originate from designated city, county and state taxes (e.g. bed taxes, cigarette taxes, state income taxes, etc.).

Artists should consider applying for grants as another strategy to complement a range of fundraising opportunities. It is important when considering grants to make certain that you have read and understand the guidelines, been in contact with the program staff at the agency and follow all directions for submitting your application and work samples.

State Grants

Ohio Arts Council Individual Excellence Awards

State funding is available in Ohio for individual artists through the Ohio Arts Council, a governmental agency. The Ohio Arts Council was created in 1965 to “foster and encourage the development of the arts and assist the preservation of Ohio’s cultural heritage.” There are several different grant programs and a variety of service programs operated by the Council.

  • Individual Excellence Awards – grants to individual artists of all disciplines
  • Traditional Arts Apprenticeship Program – grants for traditional artists interested in master artist/apprenticeship partnerships
  • Artists with Disabilities Access (grants)
  • Artist in Residence – for inclusion in the in-school artists in residence program
  • Ohio Artists On Tour – for performing artists who want to be selected for the OAOT directory

The Individual Excellence Award program funds artists directly and provides “grants to Ohio artists for the exceptional merit of a completed body of work. These awards recognize creativity and imagination that exemplify the highest level of achievement and advancement of the art form for a particular discipline.” Awards are available in all disciplines on a rotating deadline and are not project-based.

Federal Grants

National Endowment for the Arts (NEA)

The National Endowment for the Arts (NEA) offers fellowships directly to individual artists in the discipline of literature only. Artists from all states are eligible to apply. The Literature Fellowship is available to creative writers in all disciplines, and translators of exceptional talent in the areas of prose and poetry. In addition, Translation Projects enable recipients to translate work from other languages into English. Non-matching grants are for $12,500 or $25,000, depending upon the artistic excellence and merit of the project.


Foundation Support

Foundation Support

Another option for funding is through foundations. Some foundations do make grants directly to individual artists; however, that funding is usually strictly regulated. When researching foundations that fund artists directly it is a good idea to become familiar with any and all restrictions that may exist before submitting a proposal. Foundation support may be the most difficult funding for an artist to receive. There are some cases however where it does make sense to approach a foundation for a specific project, or a series of activities you are trying to fund.

In addition to providing funding, foundations can also provide valuable networking information to artists and organizations. Foundation Center is considered “the leading source of information about philanthropy worldwide.” Their Cleveland library offers a diverse selection of free and minimal-cost programs and resources. The center offers funding, training and education for both individuals and organizations while it also “maintains the most comprehensive database on U.S. and, increasingly, global grant makers and their grants.” Whether visiting the center in person or online, you will find a wealth of information for specific needs or ongoing research:

Foundation Center's GrantSpace Knowledge Base

Foundation Support

While this list is not exhaustive, you can start your search by looking at a few foundations and private organizations currently funding artists directly:

  • Creative Capital is a privately funded nonprofit organization that provides financial support to artists of all disciplines.
  • The Pollock Krasner Foundation was started by artist Lee Krasner, widow of Jackson Pollock to support the efforts of visual artists. The foundation provides funds based on artistic merit of work and financial need of the artist.
  • The Puffin Foundation provides “grants to artists and art organizations that are often excluded from mainstream opportunities due to their race, gender, or social philosophy.”


Support from Friends and Family

Support from Friends and Family

As Dorothy so aptly noted in the Wizard of OZ, “there’s no place like home.” The same is true when considering how to begin your search for finding investors interested in supporting your artwork. Family and friends are a great place to start as you think about what strategies you may use to pitch your ideas or concepts and create new leads for funding. The same people who have supported your growth as an artist may in fact be your first financial backers. Gaining this support will help you make the case to outside funders that you have a core group of individuals interested and willing to invest in your work. Start with those you trust and are most comfortable approaching. Test persuasive ways to invite family and close friends to become investors. Ask them for feedback on your approach. Solicit their opinions on your most compelling arguments for investment. This strategy will also be helpful as you refine your “ask” and move on to seek funding from other private and public lenders or foundations. The way you design your pitch is up to you and should take into account the comfort level of all involved. Other than that, be creative, have fun and set a realistic goal.

Remember as well, that while not everyone will be able or willing to donate cash to your project, there may be other ways for them to contribute. Discuss bartering or “in-kind” donations of goods or services. In-kind donations could include volunteering time at an event, use of space, reviewing documents or any other host of services that could be useful in your work.

As this type of request can be sensitive for some, there are tools that you can take advantage of that can give you a more organized approach such as crowdfunding sites like Kickstarter or IndieGoGo.


Individual Loans

Individual Loans

Once you have determined the total income you’ve invested in your work, project or business, consider individual loans that may be available to you for future projects or the creation of new works. Loans are a good way to access a large amount of funding at one time for projects that are large and/or expensive. While you will incur a monthly expense to repay the loan, it is still a good way to achieve a funding goal without investing a lot of time in the process.

Be mindful and realistically determine how large a loan payment your personal budget can sustain, and for what period of time, before pursuing this option.

Once you have made the decision to apply for a personal loan, research the loans available to suit your needs. There are a number of organizations that offer loans and support for artists and small businesses through the City of Cleveland. If you are looking for space, are improving a storefront or home, or investing in your community in some other way, talk to your community development corporation (CDC), the development department of your municipality or NHS of Greater Cleveland. These organizations may know of options available for small, low-interest loans. Search through the loans listings and service organizations for more information and additional help with obtaining a loan.

You may also want to contact a bank where you currently do business, and discuss your options with a loan officer. Research the various types of loans offered to determine the best interest rate you may be able to secure.

Credit unions are also a good place to look for loans since often their rates are more competitive than those of the larger banks. In Cuyahoga County, NoteWorthy Federal Credit Union is a unique credit union that specifically serves “the arts and entertainment community.” In addition, NoteWorthy offers “services specially designed to meet the unique professional and personal needs of artists. From competitive checking and savings accounts to low-interest credit cards and Creative Arts Project (CAP) loans, NoteWorthy provides a range of artist-friendly tools that other financial institutions don’t.”

Whatever your preference, be sure to research your options before pursuing a personal loan to make sure it is the right fit for your lifestyle and needs.


Where to Start

Where to Start

The best strategy is to start by creating a budget and determining how much funding you need to create your work or proceed with your project . Build in any costs for research, marketing or distributing your work, website design and maintenance, or any other costs specifically associated with your project. Visit the Guide to Managing Your Money for additional information on budgeting. Once you determine your budget and have a realistic sense of what you need, there are several kinds of funding you can pursue. Most often, you will use a combination of sources to obtain the funding necessary for you to complete your work. Given that the nature of every artist’s work is inherently unique, we have provided a tool box of funding sources that you may use to develop an overall funding strategy.

Your funding strategy should have clear goals and objectives. Be thoughtful in your approach; understand why you need the funds and how you will use them. Consider which options are most closely aligned with your needs. A common way to start thinking about financing any venture is in steps. Start with yourself. Record the total expenses related to the work and calculate how much additional income you can contribute. Other funders will be more likely to trust your judgment and support the project if you have committed your own assets as well. Next, if you have the option, ask your circle of family and friends to invest. There are tools and tactful ways to approach these individuals without the worry of altering a close relationship or creating an awkward family situation. This strategy is described in greater detail later on in this guide. With some initial backing, an investor or funder will be more willing to contribute to your work.

You will still need to work hard and be strategic in your funding approach as you begin to wade into the pool of individuals, organizations and businesses fighting for funds. With your hard work and a clear strategy, you can achieve your funding goals and see your creative vision come to life.