Sweet tips to simplify your accounting. EP #120 - Michael Wark

Hey, guys, Dan Lanney here, host of the how to Scale a Video business podcast. And today we're talking finance. Now, before you switch off and go, oh, God, finance, we're talking to Michael Work. He's a qualified accountant and is passionate about helping entrepreneurs level up their approach to finances and grow profitable businesses and make a positive impact in the world. Now, what's interesting about Michael is he used to work in feature films and works on some pretty big projects. What's interesting is translating those big financial decisions on a feature film down into your small business. And this starts with bringing clear steps into play to better understand your numbers and empower you to smash your financial goals and ultimately get the freedom you deserve. So what we discuss on today's show is what are the three key reports you should be keeping an eye on every month, some of the benefits of not doing your own bookkeeping, and an important lesson on why spending money on gear is not necessarily the most effective or efficient thing to do in your business. So I'm sure you're really going to enjoy the show. Please make sure and subscribe over on itunes or the app that you use, and it would be just awesome if you could leave us a review on a rating on the platform of your choice. Let's get started with the show.

Just before we get started, I just stumbled across this article about you on the Bean Ninjas website that just happened to mention that you spent some time working in the film industry. Before we get stuck into the real kind of nuts and bolts of finance, tell us a bit about that because that's obviously very relevant to this audience.

Yeah, I, I did. Look, I've produced a couple of short films actually, and I worked on a bunch of bigger Hollywood productions. I kind of got into it over in London. I worked for a production company called Working Title. I had some great experiences there and got exposure to some really cool, cool films and cool people over there, and then came back and worked on a few productions that were shooting here in Australia. So I worked on I'm Broken, which is a film Angelina Jolie directed. I worked on Alien Covenant, which Ridley Scott was out here directing. So I got to be involved in some of these bigger films and it was, it was fascinating to see all that so on on those. I was working in the finance team, so I was kind of working in the, in the finance function of these bigger productions. So, yeah, yeah, I spent a bit of time in that world and I loved it.

And of course, you know, it's called the film business because it's actually all about business. And I'd imagine these things are run in quite a corporate way. And I suppose where I love this. This lovely segue is that small video production companies who are creating their own productions, who are doing corporate, often can get very caught up in the creative. But I guess on a feature film, you guys are keeping the whole thing running because you're keeping a track of payroll and cash flow and finance. How does that relate to the small business owner? Because the principles are the same, aren't they? You know, if you run out of cash in a small business, you've had it. I guess it's the same for a feature film. You don't have a bottomless pit. So I guess it's a. It's. I'd love to just have you share a little bit about the process of why it's important to keep a track of numbers even in a creative business. And probably more so.

I think it's probably more so in a creative business because.

As is the nature with delivering a creative process, there's iterations and there is no definitive finish line. It depends on when people agree that the product is ready. So making sure that these things are budgeted and measured and that we know how much string we have to play with, I think is really, really crucial in helping manage these projects and make sure that each project is profitable and that you're not losing money or spending too much time in one area or another because that's eating into your overall, you know, week, and you can't serve other people with that time. So I think, you know, the principles of the bigger film production world, which is managing budgets, but it's just. There's a few more zeros on the end of those. It still works, you know, good money management and keeping on top of these things. It's still. The concepts still apply from the big end of town through to manage your own smaller production. Definitely.

So let's talk about the smaller end of town, because I love that analogy of just adding more zeros and I guess there's more people and more room for error. But in a smaller business, isn't there just as much room for error in that if you're not paying attention to the numbers? I love the analogy of a dashboard and you're driving a car. You've got a dashboard and you've got a fuel gauge and a speedometer and you can look ahead and see where you're going, but if you don't keep an eye on the fuel tank, you could run out of fuel before you get to your destination. And I guess that's the same in accounting, isn't it? That's the same principles of dashboard and actually knowing not just what your profit and loss is, but what your cash flow movements are.

Yeah, yeah, absolutely, absolutely. And yeah, the driving the car analogy is a great one. It really helps you understand it clearly.

It's a crucial part of it. So you mentioned a couple of things there, but obviously managing your cash flow is a really crucial part of it. There's probably three important documents even for small business owners. There's a balance sheet, there's a profit and loss, and then there's a cash flow forecast, which I think is probably the one that some small business owners may be ignoring. But that is really, really important. And that can just be a rough one and that can just be tracking what jobs you have coming up, but you need to be seeing what cash is going to be coming in the door for the next 12 months and what some of those expenses associated with that might be. So it all starts with getting quality data and having, you know, using cloud accounting software to have stuff all in one place and then working out what the right metrics are for your business that you should be looking at. And it doesn't need to be complicated, can be just one or two numbers and then at least spending a little bit of time to understand the basics of those reports and then using those to help you make decisions in your business.

Well, I think, you know, from the point of view of just let's assume someone listens to this, hasn't got a very good handle on their accounts. You talked about the balance sheet, the cash flow forecast and the P L. I think most small business owners understand profit and loss. They're like, I know when I was starting out 11 years ago, it was like, wow, as long as we've got more money being billed than we're putting out, we should be good. But can you just explain those three different reports and why they're important?

Yeah, absolutely. So the P and L most entrepreneurs will be familiar with, that's the first one we check. Usually the number right at the top, which is your top line revenue, and that is how you gauge your business's success. What's also really important that I work with clients on is to become efficient at delivering your services so there's more money left over at the end of the week or at the end of the month and that's your profit because it doesn't matter how much you sell your services for, if it's costing you more to deliver them. You have no profit at the end of the month or week to help reinvest into the business, invest in your growth or take home as a reward as the shareholder. So your P and L is really important. Most people will know that you want more revenue. You try and minimize your expenses or be really efficient with your expenses in order to scale it and get a lot of bang for your buck. So that's kind of a snapshot of how your business has performed over a set period of time. Your balance sheet is more, it's where your assets lie and it's kind of a snapshot of the value of your business at a certain date. So it'll have all your assets like your cash and you know, equipment, things like that will sit there and also any liabilities, maybe if you've got a loan or things like that. And that kind of shows the net value as the shareholder in there as well. So P and L is probably the one people look at operationally and work out how they're going week to week, month to month. And then the balance sheet is also a key part of that as well. And then the cash flow forecast, that is a more forward looking statement. So the balance sheet and panel tell you what's happened in the past or how things have gone. And the cash flow forecast is then turning that around and looking into the future with a lens and trying to predict or best guess what might be coming up to help you plan for the future and potentially change course of action. If things are looking a little bit tough and you might be running out of cash in a few months, you can then make some adjustments.

One of the common.

If you like Chinese whispers in the video production community, especially amongst freelance cameramen, is if you make some good money on a job, best thing to do is buy some equipment because then you don't have to pay tax. And this is something that has been, I've lived in the UK and Australia, I hear frequently, and it kind of disturbs me because, you know, oftentimes people will go and spend a large amount of cash flow, let's call it a $10,000 computer. They'll go and spend $10,000 on the computer because they think, well, if I've got that computer, it's an asset, I'll need it, I don't have to pay tax. What is wrong with that approach?

That's insanity. I really don't want your viewers to be doing that.

Essentially what's wrong with that is that your spending 100 bucks to save $30 on tax, but you're still having to spend $100. And removing that from the business that you could be spending in a much smarter way to help you grow or actually contribute to revenue. Now there's an argument to be made for a cameraman. If he has a viable way to charge out that gear on the next job and he can get camera rental on that, that becomes an income producing asset. Potentially could be a good investment because you're getting a return on it. But if you're just upgrading your MacBook Pro because you want the shiny new object, that's not really going to contribute to your revenue in any meaningful way. And that is, as you said, removing cash from the business that could be used in much more productive ways. So that mindset is definitely the wrong one, and it is very common. But spending a hundred bucks to save $30, you've still spent that hundred that can be used in other ways. So the way I try and talk it through with my clients is that having a profit at the end of the day is a good thing. That's a sign of a healthy business. And you can't grow sustainably by just breaking even by at the end of, you know, coming up to the end of tax time, buying a bunch of gear, and then feeling like you, you've kind of won the game because you have no tax to pay. That is, that's not a long term sustainable solution. And you should be trying to run a profitable business that pays yourself a good wage, but also has got some money left over for, you know, for future growth and things like that. So it's a common one, but it's definitely not the right way to do it.

Well, it leads me to my next point, which is so often filmmakers in my experience go onto forums and Facebook groups to kind of share and ask advice from each other on how they should best run their business. And something else that I've come up against a surprising amount of times is when I meet a business owner and we start talking about moving some coaching. I'm like, okay, so who does your books? And the number of people who say, oh, I've got zero. I just do them myself. It only takes me 15 minutes a day. And that is something else that the very first person I hired back in 2011 when I started my business was a bookkeeper. Because, well, let me ask you the question. Why is hiring a bookkeeper or a bookkeeping service so valuable? Because I think a lot of people just see it as, I don't want to pay out for this service when I can do it myself because the software makes it easy. Again, can you share some insights from your experience on why that's perhaps not the most sensible way to look at this?

Yeah, I mean we, a lot of people come through the door to be ninjas who have tried it themselves. They may not have had enough of an understanding around the mechanics of accounting. Xero is quite easy to use, but allocating things in the right way to give you some meaningful data to help you make a better decision in the future is a whole set of. It's a whole nother set of kind of problems. So people will come to us usually to outsource the problem because they don't want to have to think about it and they want to focus on running their business. But also we get people coming in the door who've made a complete mess of it and they can't even use what they've got in Xero and they've allocated things to the wrong place and that doesn't actually. It gets them into a more complicated spot than if they just did nothing and then did a catch up job later on. So some of the common problems we see with people trying to do it themselves, they might be feeding all their personal expenses through their business. I think they're kind of gaming the system again. You don't get a real snapshot of how your business is doing. And actually if you're charging enough for your services because it's kind of convoluted with a bunch of stuff that's not relevant to your business. So that's probably one where you don't get the visibility you need. If it's a sole trader or a freelancer just starting out so you don't have any staff or subcontractors, making sure you're paying yourself a set wage to help kind of manage that cash flow over time. And that'll help bring some stability when you're running your profit and loss to see how you're going month to month rather than taking out a bunch of funds when you're feeling rich and going broke for the next few months. So that's probably another really important one. Doing it yourself. You may forget about your tax obligations. So if you're charging gst, making sure you're putting aside funds for that and also your income tax obligations. So putting aside funds at the end of year, that's a huge one. Especially for freelancers who aren't on a payroll kind of system. You get a big chunk of change, but you need to Be putting aside stuff for income taxes. So that end of year surprise can be a real painful one for some people. And then, sorry, yeah, that's a few examples of people who have come in the door maybe and tried to do it themselves. And some of the problems they face or things they may not consider when trying to do it themselves.

I guess the analogy would be, I know this is something that grates most filmmakers when people call them up and say, oh, we've shot this footage yourself, can you kind of come and just fix it for us? Or Final Cut Pro or Adobe Premiere. It's a piece of software that's fairly inexpensive to access, and pretty much anyone with a couple of hours on YouTube can figure out how to make the mechanics work. But if you're a talented editor, it's the craft of editing and knowing how to stitch the story together is where the real skill is. And I guess that's what you're saying about Bean Ninjas, is you guys are there to help not just understand the software, but you understand accounting. You understand how to present numbers. And I guess for me, the thing about great bookkeeping and great accounting has always been that you can sleep easy at night because you know exactly what your liabilities are. As opposed to coming to the end of the financial year, everyone scrambles around, they look at their top line and they go, well, I need to spend some of this money because if I don't, I'm going to pay tax. And of course that's only the first, the first hole to fall into, isn't it?

Yeah, absolutely. I guess it depends what you want out of your numbers. If you okay with just a cursory kind of top line idea about what you're doing and that's enough for you, then maybe it's not necessary, but if you want to be actually getting some value from them, maybe you want to be tracking how profitable certain jobs or certain clients are to help you work out further down the line. Do I want to work with them again or is that not really a profitable service I'm delivering? Those are the kind of insights you can get from good bookkeeping you can't necessarily get from your gut instinct. So it depends kind of what kind of value you're looking for from your numbers, if you're trying to use it to actually help you improve your business or make decisions about the right job, how much you should be pricing that job, things like that, tracking your overruns that can really help by having good data which comes from regular bookkeeping. But yeah, I guess it depends how much you want out of it.

Yeah. So what other advice would you give to a small video production company who perhaps has been running their own books for a while? What are some of the steps you would recommend they take to make, to turn that into something that's going to be very valuable?

So do you mean in terms of like they're running their bookkeeping and, and things they should be considering to help improve or what? What do you mean by that?

Yeah, I mean, I think so, but, but more so, I, I, I, I guess I, I'm a big advocate of outsourcing. You know, outsource that process to someone with knowledge. So maybe a better question is why would someone, why would you rec.

Looks at a service like yours as opposed to trying to figure out themselves? And I guess the reason I'm asking this question, and sorry for the confusion, is that filmmakers tend to try and do things themselves because they think, ah, if I do it myself, it will save me money or I can keep more of the profit. And I think that the problem with that is, is it's too much of a lack mindset. It's way too much like a freelance sole trader mindset. And I think to play to what you're saying about scaling and actually thinking about the future and growth.

What are some of the reasons if someone's sitting here thinking, oh, you know, I just want to pay someone, you know, a fee every month to do my books when I can do them myself, I'm not that busy, I guess. What would be some of the reasons you would suggest not to do that?

I mean, the opportunity cost of you having to learn that and perform that in your business is probably not the correct use of your own resources. You'd be a specialist in, in whatever craft that you're specializing in editing, you know, dop, whatever that, whatever that is, you should be charging that out as an hourly rate and getting paid 600 bucks an hour. Not in the trenches doing bookkeeping when you can outsource it for a lot less. So it's probably the opportunity cost of the time, it's the potential to make a mistake and that might come back to haunt you at tax time and things like that. It's the lack of clarity over what these numbers mean and having that kind of person to tell you what they mean and how you can improve them. So to give you that kind of value added performance based aspect of how the business is going and also long term, you're not going to be doing it in your business. So if you Want to grow and develop, you're going to need to get used to not wearing all of the hats in your business and making sure you've got an expert in each of the different seats so you can focus on what you're good at in the business and then let the other people take care of the rest, which frees you up and your brain up to focus on the key tasks. For someone just starting out, it does make sense maybe if you don't have a lot of cash flow to try and manage it yourself. But once there is a little bit of momentum in the business, it's usually a service that most people feel pretty comfortable outsourcing these days, to be honest.

And just because I think some people are confused by bookkeeping and accounting. I mean, bookkeeping is more than just tracking data, isn't it? It's about inputting that data correctly. It's about making sure that you can interpret those numbers at the end of each month. What are some of the things that you can, I guess, predict from looking at a set of accounts on a monthly basis rather than waiting till the end of the handing over a box of receipts to your accountant and hoping with your fingers crossed that there's like, you know, there's going to be some, some money left over?

Yeah, I mean, I mean, the big one for the smaller size businesses would be keeping a track of your expenses and making sure that over time these things aren't fluctuating too much out of line with what your revenues are bringing in. So being able to keep a solid track of, of what it's costing you to run your business is probably a big one. Obviously, tracking the revenue and making sure you're on track with that. But that's an obvious one that most people will do regardless of bookkeeping or not. So it's about having, I mean, for us, for me, bookkeeping is about using the right accounting system. So we use Xero, making sure you've plugged in your bank accounts, doing the coding consistently to each of the different expenses, and doing it on a regular basis as well, doing it every two weeks or a month to make sure that you're getting that reporting. So you're actually looking at those reports. Probably the big blind spot is for people doing it themselves is they may do the bank reconciliations and code everything and then they close it up because it's done and they don't actually try and take that next step in the reporting and say, how much cash have I got in my bank? What are my sales looking like coming up, Am I going to run out of cash? Do I have any sales? And then doing some things about looking at what your expense management is as well. So those are probably some key basic things that having a set of reports that you can look at might help you with. And then there's more detailed analysis, depending on the business structure and working out, as I mentioned earlier, like which jobs are profitable, which clients are profitable, and more detailed things like that as well.

You know, it's, it always blows my mind that I have some really good friends who are pretty, pretty talented and are doing, you know.

Mid six figures. And when I say, how's things going? He's like, yeah, it's pretty cool. Yeah, we're doing all right. I said, you know, are you, how are you tracking with your numbers? He's like, oh, I don't know, kind of around about, you know, 250, 300. And, and like, they've got absolutely no idea. And, and this, this one friend of mine recently just won a big job and, and went out and spent 20 grand of it on a camera just as a kind of like, wow, you know, that, that, that mentality of spend the money quick before the tax man gets it. And you know, these, these same people have had issues with the, with the tax office in the past because they get a surprise. And I guess the analogy there is that I, I know so many stories of videographers, small production companies who just ignore it. And I, I, I just, I don't know how to. I guess one of the reasons I want to get you on the show is because I think it's such a, such an important subject that, I mean, having a good bookkeeper has saved me hundreds of thousands of dollars over the years because, as you say, it's avoiding those blind spots.

What is that? What does a monthly report tell you about your business that is really useful for forward planning?

It's going to tell you how sustainable is the business and what are the key areas you need to be keeping an eye on. So.

Making sure you're looking at the trends over time. So when I run a set of reports for a client, I'll be looking at not just this month, but I'll be looking at the past eight months, nine months, depending on the year. And then we have a look at it as a percentage. How are these numbers moving up or down? So someone runs one of these reports for just this month, it may not add a huge amount of value to them. I would suggest run it with a comparative period going back in time to See how these numbers are moving over time, and analyzing the trends of how these things are moving is actually going to tell you a lot more information about your business. And that will tell you that will be an early warning signal if things are trending in the wrong way. If your revenue is trending down, but your expenses are up, you need to address that and you need to look at why that's happening. So being able to see the movement of trends in your data going back in time will help you predict what's going to happen in the future and then take evasive action. Maybe you need. It depends on what level of business they are. So if your friends running a team with staff and managing staff and payroll, that's a whole nother kettle of fish. Maybe if he's on his own and just doing those kind of figures, it is kind of manageable because perhaps he can really reduce his expenses when he needs to, or when she needs to in order to get through these periods.

One really handy strategy that a lot of our clients are using at the moment is something called Profit first, which is a cash flow management strategy. So this might be a nice midway point for people maybe not ready for reporting, but wanting to kind of better budget in their business. And profit first basically gets you to split up things into different buckets in different bank accounts, and you split it up into income, profit, owner's compensation, tax and operating expenses. So it breaks it up for the key areas of your business. And then you allocate out a certain percentage into each of those key buckets, which are the main things that you need to be looking after in your business. And that helps you put aside funds for tax, put aside funds to pay yourself. And then what you have left over is the operating expenses you've got to play with. And then you can decide if you can buy that 20 grand camera, because sometimes you can afford it, sometimes you can't. But quite often if you buy the 20 grand camera, and then people will come in the door to us and say, I've got an ATO payment plan bill and I need to pay back to the government 30 grand from last year's taxes. And then they've got this debt that's weighing over them. So you just need to be aware of your future financial commitments and not just how you did this month.

Yeah, and I think another thing that I have been doing for quite a little while now is every month I go through my expenses line by line, because I think especially in the video production space in the kind of small, you know, One man band, maybe two. Two team up to about half a million dollars.

There are lots of hidden expenses in video production. Ever since Adobe moved to subscription model. There are so many services. They are $49 a month, $97 a month, $297 a month. And those things can really start to add up. And I go through and every month I look at what are we still paying for and are we still using it? And I find that that's a really beneficial process. Is that something you guys recommend and what other kind of things do you recommend people do on a monthly basis to kind of just make sure they're actually reading the data and the reports, not just simply pressing reconcile and then looking at a profit loss sheet?

Yeah, doing an expense analysis definitely would help. I think adding that extra element of the cash flow forecast helps address a lot of these problems, and it brings a hell of a lot of value. There's fairly simple templates you can get online to help you do a cash flow forecast, but basically it lets you run your data and your reports from how you've been going over the past six months, and then you're trying to predict out how you will go over the next few months. And part of that process is predicting out your expenses for the next six months. And you have to enter them line by line, which naturally lets you examine, actually, do I need all of these? Because you can see your expense, those subscriptions stretching out in time for the next 12 months. And you start to realize that actually that's a lot of money over the next 12 months if I'm still paying for this. And you see the power of reducing these things now to save money into the future. And the forecast also plugs that gap because you have to predict out your revenues, which makes you think about your sales strategy and how are things going to be looking and do I have enough retainer work? Do I need to be going out and trying to find bigger jobs to fill the pieces there? So I think doing a cash flow forecast is a really, really useful task for any small business owner. And that's one I'd highly recommend to help open up those conversations in a natural way.

I think something else that I did recently, I bought a new laptop two years ago, and the laptop I was looking at was $8,000. I remember that time just thinking, that is $8,000 of cash flow. And I asked myself the question, why do I need to own this? And at the time, Apple had a business financing leasing service, and we're just coming to the End of that lease, I think it cost me a thousand dollars a quarter, $300 a month. Now I got full access to that laptop in, in month one, but I was only paying $300 a month. We're coming to the end of the term. Now technically I've paid the same amount of money in leasing it as it would have been to buy it outright. And I'm going to just hand it back now. That to me made a lot of sense because I can now take out another lease on another piece of equipment. But what was interesting was that was fully tax deductible because it was a leased piece of equipment rather than only claiming a certain amount of tax dealt with that is leasing something that is a good idea. And obviously you can't necessarily give advice. But from an accounting perspective, what are the benefits of leasing over buying equipment?

Yeah, as you said, it's amazing impact on your cash flow. You don't have to have that three to six grand up front and take that hit from the start.

With leasing, I think the devil is in the detail and making sure you know what the terms are and what interest charges may or may not be in the future and how easy it is to get in or out of that lease, what the break clauses are if circumstances change. So from an accounting perspective, having it as a lease and having it as an expense on your P L is great. But for those people maybe who want a bit more certainty, they may want to buy it and keep it as an asset on their balance sheet and depreciate it via accounting principles. So it depends on what your cash reserves are like. But leasing is definitely an option, especially for the, for the larger assets in a business.

Yeah, fantastic. Well, Michael, this has been really helpful. Now you obviously work at Bean Ninjas. Tell us a bit about some of the resources available. If someone's sitting listening to this or watching this and they don't have a bookkeeper, what's. What's the best next step for them to. To engage with you?

We.

They can come and visit us at Bean Ninjas. I'm also on LinkedIn. My name is Michael. Walk W a R K. Feel free to get in touch and drop us a line. So we help people with recurring bookkeeping and I personally help people with in a virtual CFO role. So help them use that data and make better strategic decisions. That's kind of the role I do at bninjas, but we have a great recurring bookkeeping team as well for people looking to maybe outsource that and stop spending time in those kind of areas. So yeah, bninjas.com and there's a Contact Us page where you can drop your details in and we could try and line up a call. Otherwise you can have me on LinkedIn as well.

Well, mate, we will link to that beneath this podcast. Thank you so much. I actually love these conversations because they're, they're not necessarily sexy, but actually once you get into them, once you get really solid numbers, the amount of clarity it gives you, the amount of security you feel is life changing. Hey guys, thanks for watching. I hope you got a huge amount of value from that episode. If you're looking for additional support or resources to support your business journey, then head over to Denlenny.com where you can get a whole heap of other resources, free downloads, and access all the other episodes in the series. Be sure to subscribe and I'll see you next time.