Financial responsibility has plagued creatives
throughout the history of the world. In art history
courses, we learn about famous artists who died
penniless and in mental despair. It’s no coincidence
these two spheres—creativity and money—are
constantly at odds for many graphic designers,
especially in these uncertain economic times.
What are the signs a designer isn’t managing
his financial future correctly, and what’s the remedy?
For this issue, we presented the question to certified
financial planners and certified public accountants
across the United States. We found a wide array of
answers, but the following were mentioned repeatedly:
NOT PAYING QUARTERLY TAXES
By far the most discussed mistake is designers
not paying estimated quarterly taxes on time.
According to U.S. federal law, every business is
required to pay quarterly taxes to the IRS. These
payments are estimations of what the company owes
for that quarter. Freelancers are also obligated to pay
this quarterly estimation, but most do not. When
the payment is not made, the IRS will fine the company,
or freelancer, at the end of the year when the
taxes get filed.
Mike Piper, principal of Piper Tax, says it’s a bittersweet
wake-up call for most designers. “After years
of having taxes automatically withheld from paychecks,
it can be quite a jolt to realize you’re now on
the hook for remembering to actually mail a check
to the Department of Treasury four times each year.”
He goes on to say, “Unfortunately for these taxpayers,
making estimated tax payments isn’t optional if
you have self-employment income. The penalty for
underpayment of taxes is usually calculated at an
annual rate of 7 or 8 percent for the period of underpayment.
The exact percentage used varies as a function
of current Treasury Bill rates.”
Piper’s blog, Taxes Made Simple (www.simplesubjects.com/tax), offers straightforward, easy-tounderstand
insight on how to handle quarterly
payments, as well as other tax-related questions.
Also check out the friendly advice from the IRS
INVESTING IN UNNECESSARY
Do I really need a new iPhone? Can I design just
as well with CS3 as with CS4? These are the questions
every designer should ask before making a
new technology purchase. As creatives we certainly
get mesmerized by the excitement of anything new
and shiny, but this can be a serious financial abyss.
Jeremy Knauff of Wildfire Media Group knows
this scenario well: “There have been times when we
have invested in overpowered hardware and software
that, while it made the work easier, certainly wasn’t
justified by the revenue at that point in time. It
becomes a bigger issue down the road because the
same hardware and software can be acquired for
substantially less in as few as six to 12 months. The
money invested could have been better used to grow
the business instead.”
Another issue with technology is the buy-versus-lease dilemma. “Designers need to look at
capital equipment needs and balance fast-changing
technology, tax benefits of equipment ownership
and the burden of financing the equipment,” says
James Deluccia of the Pennsylvania Institute of
Certified Public Accountants. “Paying off all [purchases]
at once mismatches the cost of acquisition
with the revenue stream to be earned. However,
extensive time financing may add a heavier interest cost, and one could find himself with remaining
loan balances after the technology has already
changed to the next version or generation. Try to
match the acquisition-debt time period with the
estimated recouping revenue stream and projected
lifespan of the technology itself.”
NOT STAYING INVOLVED IN FINANCES
Being creative often gives designers a feeling of anxiety
and apathy when it comes to handling finances.
You wonder, “Why should I do it when I can hire
someone?” While it’s good to use the services of a
financial professional, creatives should also be cautious
to not remove themselves entirely from the
financial process of their businesses.
Joel R. Beck, principal of The Beck Law Firm,
sees this problem happen often: “You have a vested
interest in your money. The brokers and advisors you
hire don’t. It’s important to open the mail, review the
statements, monitor the activity in bank and investment
accounts. You can’t say, ‘I’m a creative type, not
a numbers type, so I don’t need to do that.’ Never let
someone else sign your checks!”
Another poor practice by creatives is trying to
hire the cheapest professional, regardless of credibility
or prior experience. “Quality does not necessarily
mean high cost; you just need to do due diligence
and focus on work product more than the cost,” says
Apollo Sinkevicius of Revolve Business Consulting.
“Sometimes your savings will get you into a situation
where you will lose your company.”
How do we keep ourselves from getting in this
mess? Research financial professionals you want to
work with. Ask how long they have been doing this,
where they will do the work (on-site at least once
a month), what other clients they’ve worked with
in industries similar to yours, and see if they could
start out on a trial basis with you for a few months
so both of you can see if the relationship will work.
OPERATING WITHOUT A CONTRACT
It is absolutely naive to take on any project for a
client or for a friend without a written agreement
in place beforehand. “Use a written agreement to
define the scope of work to be provided, the fees and methods of payments,” says Beck. “Do this
upfront to avoid disputes later.”
A good contract will identify at least what the
deliverables will be from you to your client, and what
compensation you will receive from those deliverables.
The acronym TACO is a simple way to know
if you are ready to take on a new project.
Terms: When is payment due, what happens
if the project ends early, late payments and so on?
Acceptance: Have both parties acknowledged
their agreement of the contract by signing it?
Compensation: Has compensation for the
designer’s work been specifically explained?
Obligation: Does the contract define the specific
obligation of the designer, and the client, in regards
to deliverables, approvals and the process?
Deluccia offers this advice, “Protect yourself. Be
optimistically cautious with regard to contingent
liabilities—due dates or failing to deliver what may
have been expected on time via a different perspective
than anticipated could result in litigation or
fee disputes. Studios, creative freelancers and the
customers need to keep open communication so
expectations are managed to increase the probabilities
NOT WORKING ON THE BUSINESS
Naturally, when you’re a principal of a design studio,
your first inclination every week is to take charge of
the projects in the shop at that time, lend a helping
design eye to the creative vision your team is selling
to clients, and putting out any fires that occur
throughout the week. This is normal and somewhat
expected for principals, but the most overlooked
part of the principal’s job is taking the time to concentrate
on the business, not just in it.
Tom Pryor, an accounting professor at the
University of Texas at Arlington, gives these words
of advice: “Business owners need a Paul, Barnabas
and Timothy in their life. A wise, successful ‘Paul’
who has experience in small business. An outspoken
‘Barnabas’ who will encourage owners when they
need it and correct them when they’re wrong. And a
young ‘Timothy’ who the business owner can teach
and bring alongside him as the business grows.”
A standard for principals should be to spend 25
percent of their time a week working on the business
and planning its future. Block out time in your calendar,
cancel any other meetings and make sure you
stay focused each week to work on your business.
LAZY OR FORGETFUL INVOICING
You’ve done the work, and you should get paid
for it, so why do designers forget to invoice? Most
design studios demand at least one payment up front
before beginning a project, but it is the following
payments that often get overlooked.
“With credit lines being cut back and interest
rates sometimes being doubled or tripled by credit
card companies, a business can’t afford to wait 60
to 90 days or more to get paid for its work,” says
Janet Attard, founder of www.businessknowhow.com. “Assuming customers aren’t having cash flow
problems themselves, the sooner the customer
gets invoiced, the sooner that invoice will make it
through to the right people—first to be approved for
payment, and then ultimately to get paid.”
Attard adds, “So instead of waiting until the end
of the month to send out invoices—or until someone
eventually gets around to it—final invoices should
be sent as soon as the job is done and accepted. Any
jobs that will take much time and/or involve any
significant out-of-pocket costs should be billed and
collected in progress payments, too.”
There are some excellent tools that can streamline the process. They’ll help you track hours, send
invoices, send reminders and some can even connect
to your bank account for automatic payment when
it is received through the service. Check out web
applications like www.freshbooks.com and www.blinksale.com.
NOT KEEPING TRACK OF DEDUCTIBLES
Receipts: You probably have a shoe box stuffed with
them to file at the end of the year with your accountant.
Many accountants note freelancers only deduct
a fraction of their business costs because they either
didn’t record the payment in the first place or simply
didn’t realize they could deduct it.
A great practice is making sure you write what you
spend the money for on the back of the receipt when
you immediately get it. When you get back to the
office, tape the receipt to a regular 8.5 x 11-in. piece
of paper and store it in a file cabinet. Then when
tax season rolls around, you have nicely archived
receipts to give your accountant.
KEEP LEARNING, ADAPTING AND
DON’T BE AFRAID
Financial understanding is something we all strive
for in our businesses, so don’t be ashamed you might
be making some of the mistakes we’ve mentioned.
Instead, learn from them, adapt your financial flow
to help turn your mistakes around and remember
your financial future is something you can start controlling