The main issue with realizing your life’s ambition is dealing with it daily. When you envisioned having a production company, you probably thought of making incredible films with a team of people you deeply admire and respect. Maybe this vision included awards, big budgets, or high-profile talent, but there’s a slim chance that any part of that dream scenario included dealing with finances. That part’s no fun.
Fortunately, there are some nerds out there who think that accounting is a blast. You don’t need to share these interests. That’s probably why you hired an accountant; your company’s finances became too sophisticated, and a DIY approach no longer worked. A good accountant can understand your industry and provide pertinent information about your company's financial health. But the bigger question is how the reporting is used once you receive it. Your accountant’s business acumen should provide invaluable insights that allow you to run your production company like the pro you are, and it’s a lot easier than it seems.
Profitability vs. Cash Flow
Profitability and cash flow may sound synonymous, but they’re not. Profitability refers to your company's income after all expenses have been paid. Cash flow measures how much cash moves in and out of your business account over a specific period, either to pay expenses and receive income or for other reasons - like receiving loans or paying off debt. Together, they provide a guide for making significant business decisions, like whether you’re able to invest – in staff, projects, space, or equipment – and how much.
Given the practice of sequential liability in our industry – where an agency will only pay its production vendor once they have received payment from their client – understanding cash flow and how to navigate cash issues is paramount to running a production company.
Payments vs. Receivables
Accounts payable refers to money your company owes to others. This can include paying vendors or locations, your employees, and rent or mortgage payments on your office location. Accounts receivable refers to money owed to your company by others.
By evaluating these two pieces of information in relation to each other, you will be able to understand at a fundamental level how your cash will move over the course of about 30-60 days.
Balance Sheet
When your accountant pulls out your balance sheet, your eyes may glaze over. A balance sheet can be overwhelming if you don’t know what you’re looking at. But here’s the best news: instead of having to separately assess your profitability, cash flow, payments, and receivables to make comprehensive sense of your finances, you can simply look at your balance sheet, which includes all of this information.
Balance sheets provide a snapshot of your company's entire financial life at a single moment in time. It will show you how much you’ve made not only this year so far, but in prior years as well. It will also show all of your company’s assets (including cash, receivables, and equipment) and its liabilities (including payables, loans, credit cards, and other debt).
Taking the time to look at the balance sheet and vetting it for errors is critical to ensuring the integrity of all your financial reporting and provides visibility into how your company has performed not just over a recent period, but since its inception.
It comes down to this simple truth: you hired your accountant for one thing, but you and your business partners are actually getting a surplus of valuable information - you just need to know how to use it effectively. While this may be new territory, and you feel out of your depth, these are the growing pains that come with progress. If this is unknown terrain and you need help managing your cash, that's a good thing. It means you're growing. This is unknown terrain for your company, and that’s good. It means you’re growing.
