The expansive and evolving nature of the entertainment industry makes for several unique financial challenges. These include managing irregular income streams, royalties in the streaming age, and dealing with new business models and tax planning. However, the common problems in entertainment accounting can be simplified by using software like QuickBooks, along with the expertise of a CPA.
Managing Irregular Cash Flow
One of the greatest challenges unique to this industry is income inconsistency. The diverse nature of entertainment leads to a range of income sources, including royalties and residuals, sponsorships, merchandising, and ticket sales.
This can result in difficulty managing cash flow and complications in entertainment accounting data integrity. This can have significant implications for your taxes.
Different income streams may be subject to different taxes, such as sales tax on merchandise. The region in which your business is conducted, and the specific type of entertainment you offer can also affect your overall taxation.
For that reason, accurate financial planning and tracking are essential for entertainment businesses.
How to improve financial tracking
Automating your data entries can greatly simplify financial reporting through greater accuracy while saving you time. With QuickBooks, it’s possible to automate and manage your reports and accounts receivable. You can also automate payments for recurring invoices. Moreover, as QuickBooks has integrations with third-party marketplaces and apps like Salesforce, you’ll be able to keep track of income from various sources.
A CPA can amplify the usefulness of this automation by helping you to establish procedures to manage cash flow effectively during off-peak seasons. This allows you to improve productivity and build a foundation for future growth.
The competitive nature of the entertainment industry is a further challenge. It has led to the emergence of new business models and methods of economic growth.
The Challenges of Royalties and Residuals with Streaming
Technological advancements play a huge role in the entertainment industry. In addition to traditional income streams for entertainment, content creators can connect directly to consumers across platforms like YouTube and social media, or earn income from streaming and on-demand viewing services.
Before streaming, revenue for television was tied to metrics like advertising revenue and run performance. Streaming has led to the emergence of new business models, which have changed that. These new models further complicate income streams and the tracking of royalties and residuals.
How streaming complicates revenue tracking
In a streaming model, media is categorized in three ways:
- Ad-supported streaming services (ADSS) like YouTube.
- Electronic sell-through (EST) or Download-to-Own (DTO) for music, movies, games, and more.
- Streaming video on demand (SVOD) services like Netflix.
This can be further divided into new content, such as a Netflix original series, or historic content, which includes content produced after 1971.
Calculating royalties and residuals in the streaming age also depends on whether a production is considered high or low budget. High-budget content is that which costs over $1 million to produce a 30-minute episode, or over $1.7 million for a one-hour episode. Low-budget content comes in below the high-budget threshold and is also influenced by the guild responsible for creating the content.
These and other nuances mean that residual and royalty calculations are more complicated than ever.
To help you, QuickBooks offers a Class Tracking feature to assist businesses with payments to split income based on royalties and residuals. However, the additional input of a CPA is vital.
How a CPA can help
CPAs can keep track of guild rates, and create detailed residual reports based on contracts and payroll. CPAs are also able to assist with the tax implications of these payments, as royalties are generally considered self-employment income subject to self-employment tax. As an added benefit, a CPA can help entertainers with tax credits for entertainment professionals.
A final consideration for entertainment accounting is the fact that most income is dependent on a specific project. Beyond irregular income, this can lead to complications in budgeting and revenue forecasting.
Project-Based Budgeting and Forecasting
Revenue forecasting is a vital component of entertainment accounting. Regardless of the type of project, forecasting is an essential tool to help with per-project budgeting.
But how do you ensure that you can accurately forecast your income when most entertainment businesses face the challenge of irregular income streams?
QuickBooks offers a brilliant solution for this: the cash flow planner. By examining your financial history, the software can create a cash flow statement and forecast income and expenses for 90 days.
With an accurate forecast, it’s much easier to allow for budgeting flexibility, and expense tracking.
The nuances of expense tracking
Despite the varied nature of the industry, it’s generally easiest to track expenses with a detailed record of all project costs. Within the entertainment sector, this can be done in three ways:
- By category, where expenses are allocated to specific project aspects like production, marketing, or distribution.
- By project.
- By client.
Naturally, these variables mean that it’s possible to make mistakes in your entertainment accounting.
How to rectify this
For added simplification, QuickBooks allows for project-based accounting. Unlike general financial accounting, which tracks transactions monthly, project accounting tracks from the start to the end of a project’s life cycle. Likewise, where general accounting breaks costs down into broad categories like accounts payable and accounts receivable, QuickBooks project accounting allows for refinement tailored for specific aspects of each project.
A CPA can offer additional guidance on how to replace cumbersome budgeting with continuous planning and forecasts. As an added advantage, CPAs can assist you with tax planning and claims for projects, such as how to maximize deductions related to production costs.
When it comes to the balancing act of thriving in a creative industry while ensuring financial stability, a powerful accounting tool like QuickBooks can be invaluable. Combined with the strategic insights and personalized guidance of a CPA, you’ll have no trouble navigating the complex financial landscape of entertainment accounting.
To see how our CPAs can help you take your financial health to the next level, schedule a discovery call.
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