What Your Balance Sheet Can Tell You

Production companies sometimes think that the income statement, or the profit & loss (P&L) report, is their only important financial statement. But in reality, reports like your balance sheet, will give you a much more complete picture of your business health. 

More specifically, your income statement details your income, expenses, and net profit over a period of time (e.g., monthly, quarterly, and annually) — but your balance sheet sums up all activity at a particular point in time.

Let’s talk a little more about the balance sheet. 

What's your production company’s balance sheet trying to tell you? 

Your balance sheet is a solid snapshot of your production company’s financial health. It's a breakdown of your assets and liabilities. It also includes shareholder’s equity (the difference between what you own and owe). The balance sheet can give you an idea of the financial resources available to you, the overall debt load, and how much you can borrow. It also provides you with a bird’s eye view of how profitable your company is.

Your production company’s balance sheet has a lot of information on it. It might seem initially overwhelming, but we’re going to break it down piece-by-piece. 

Cash 

Your cash balance on the day of the report (usually at the end of the month). This is the most straightforward. It’s literally what liquid cash you have in the bank that could be spent immediately. 

Accounts receivable 

The money owed to you, which will be cash upon collection. This can be payments from a brand (for a commercial production company), next stages of funding (for an indie film shoot), or even profits due for a released film.

Any money that you know is coming to you in the next 90 days or so, but isn’t with you yet, is accounts receivable.

Accounts payable 

The money you owe ‌vendors, which you'll likely be paying out within the next 30 to 60 days. These can include things like location rentals, equipment rentals, and production payroll.

Loans payable or other liabilities  

The amount of money you owe to others on a payment plan or other longer-term agreement (i.e., you haven't received a bill for it but know you owe it). For example: credit lines, term loans, owed commissions, or incurred (but not yet billed) estimated expenses.  

These are distinct from accounts payable because the cash typically moves over a longer period of time (in the case of loans payable), or are expenses you’re aware of but don’t have an immediate-term need to pay (like production expenses for a job a few weeks down the line). 

Fixed assets 

Your collective payments for substantial equipment (cameras, editing bays, soundstages) accompanied by the accumulated depreciation, which shows how much of these costs have been expensed over time.  

Equity  

The amount left if you were to liquidate all of your assets and your liabilities. This is actually a super-basic definition, and it can get a lot more complicated, quickly.

Equity can also include:

‍Stock/Capital contributions – the amount of money you've invested in your business (depending on your business's type of legal entity), such as purchased stock or personal monetary contributions. 

Retained earnings – your company's total net income since its start, less the money withdrawn by owners in partner distributions or shareholder dividends

Listen to what your balance sheet is saying about your production company

Your balance sheet is trying to tell you about your production company’s financial well-being. Is it healthy? Is it unhealthy? What direction are things going in?

If nothing else, remember that if your cash + accounts receivable – accounts payable is positive, you should have some money to fund your business. 

Divide that number by your average monthly overhead, you'll know how many months you could potentially survive a downturn in business.  As the recent Covid-19 pandemic taught us, it’s always good to understand and know that number.  

Unexpected downturns might come at any moment, so being ready to weather those storms is good financial planning.

That being said, we understand that you might have a few more nuanced questions.

Why does my business always seem to need cash? I have a strong net income!

If your net income is green and healthy, but you always seem to be short on cash, there might be a few culprits.  Listen to your balance sheet and look for the answer. Two common answers are:

Slow customer receivable collections - A lot of cash hasn't reached you yet because your payments aren’t reaching you quickly enough. Reach out and see about turning that potential cash into actual cash.

Significant equipment, development, or inventory costs – Your cash is tied up in equipment, property, or other assets needed to run your business. This may simply be the cost of doing business, but look into less expensive ways to get what you need, such as renting.

My income statement shows little or no profit, but I’m sitting on cash- why?

While this isn’t the worst problem to have, it can be confusing. It can also make it hard to intuitively gauge how your production company is doing. If you have lots of cash on hand, things must be going great, right?

Not necessarily. Again, look at your balance sheet to determine what else might be going on. Examples include:

Capital investments, loans, or other liabilities – You have received cash that doesn’t need to be paid back quickly, so your available cash hasn't been generated by profit. Producing feature films, for example, takes a long time. It may be months or even years before you have a finished product.

Customers pay advances on your products or services – cash received in advance is considered a liability, or deferred revenue, until you deliver the products or services.

Cash available upfront can be great for your business, but it's important to recognize that you may not have earned it yet. 

Wrapping up

Thanks to Syzygy for sharing their insights with us. You can read the original post on their website.

If you need any help reviewing your financial statements such as your balance sheet, seek an accountant who can help you at least understand the most basic reports on your financial status. Once you do, you'll feel empowered to make smart decisions for your business.

One of the biggest expenses for any production company is payroll for your productions. Learn how to manage your payroll with Wrapbook and keep that balance sheet looking green.