Anyone in creative services will tell you that coming up with the big idea is the easy part. Delivering it on time and budget is the trick. Project briefs change, contractor costs blow out, and clients challenge invoices. Accounting for creatives is complicated.
Profitability challenges for agencies and freelancers
Creative industries are full of financial challenges. Very few of your clients will understand the creative process, and may end up disputing invoice items like:
- handling changes to briefs and artwork
- proofreading, user testing and other kinds of quality control
Clients can also struggle to assess ideas objectively – or without seeing finished artwork – which will add cost to your projects. And because most creative work is multidisciplinary, you’ll probably end up handling costs for third-party vendors and contractors.
Accounting tips to help
Good client communication will help avoid many of these traps, but internal accounting systems also have a role to play. You’ll do much better if you can:
- create realistic estimates
- send detailed invoices
- get reimbursed for expenses
- stay on top of cash flow – and get access to credit
- simplify payroll for your ever-changing staff and freelance roster
Estimates and invoices
An accurate estimate and a detailed invoice are the bookends of good agency accounting. And both come down to time recording.
- Estimates can be created by looking at comparable projects in your past.
- Invoices should be backed by records of the work done.
Even if you charge by project, you need to know how much that work is costing you in salaries. You want a system that captures time without adding layers of admin and aggravation.
Simplified time-recording is key
Creative staff aren’t great at entering their time because, traditionally, it’s been a chore. But there are now much better designed systems that won’t get in the way of their workflow.
If you use software that makes it genuinely easy to enter time and switch between jobs, you’ll be rewarded with much better data – and improved agency accounting.
How to use the data
Just capturing time records isn’t enough. You want to analyze that data and use it right across your business. Once you connect time-recording apps to your accounting software, the data will flow through automatically so you can:
- send detailed invoices
You’ll be better able to explain the work you charged for.
- process payroll
Use the same data to figure out what you owe your freelancers or contractors.
- improve business efficiency
See if certain jobs or tasks always create big labour costs, and require a new approach.
- create accurate estimates
Check out the real costs of past projects to help with estimates and quotes.
- deal with scope creep fairly
When clients ask for extra work, you should really get them to approve a separate budget. But if you do the work in good faith, time records can help you negotiate fees afterwards.
Versatile accounting software will allow you to change time-recording systems as your needs change and grow.
You probably carry costs for clients on things like web hosting, photography, printing, venue hire, or even just couriers. Bills can arrive in bunches, so process them on the spot to ensure they don’t get lost. Try using an online system so you can:
- submit (and code) expenses from the road
- approve vendor bills from your phone
- easily add a mark-up
Automated expense reporting, a functionality which Xero provides, will help you move fast, ensuring costs are passed on properly and preventing backlogs of admin.
Staying in the black
Anyone who’s done accounting for creatives knows there are busy times and dead times. Income can fluctuate dramatically – as can expenses. It’s really important to stay on top of both.
Because you’re often paying third-party vendors on behalf of clients, bad cash flow can stall projects and cause embarrassment. Try to use cash flow dashboards to track money in and money out.
- They’ll tell you how much money you have to spend today.
- If plugged into your invoicing and expense system, they’ll also predict cash flow for tomorrow.
When using these dashboards well, you can see if there’s a crunch coming up, and plan accordingly. They’re a lot faster and more effective than spreadsheets.
Ensuring access to credit
Big jobs can bring lots of opportunity, but also lots of cost. If you need to cover large third-party costs, or hire a bunch of freelancers, it helps to have a dependable line of credit.
Don’t wait until you need it. Find out how much credit you can get now – and ask how quickly you can get it – so you’re always ready. It will help you act with confidence.
Minimizing payroll paperwork
Human resources are a big variable in agency accounting. Payroll can double overnight if you take on freelancers for a big job. Creative agencies also experience high turnover among permanent staff, so flexible payroll is a must.
- You need to be able to add new staff quickly and easily.
- You should be able to pay people at any time (freelancers won’t always fit your pay cycle).
- Tax forms (if applicable) should be automatically completed by the software.
A lot of people will come and go from your payroll – you don’t want to be stuck with a mountain of paperwork each time.
Building a system that does accounting for creatives
Correctly estimating and successfully billing for creative work is a challenge. And yet it’s critical to agency accounting – whether you’re big or small.
You can build a system that supports all these functions using subscription-based business software. Study the market and choose from dozens of apps to assemble the perfect system for your agency. Once you have the right technology in place, many of these accounting tasks will be automated so you can forget the back-office hassle and concentrate on being creative.
If you would like to know more about Xero or would like to take up our discounted implementation offer, submit your contact details here and one of our consultants will be in touch.
This article is an extract from the Xero website and is written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of its contents.