Unit 4: Generating Income

How do we make that money? In this unit, we'll look at the primary methods for creating income for your business. The unit will start with an overview of basic financial concepts, followed by primers on fundraising and earning an income, and capping off with best practices for budget development and proposal writing.

Five chapters in this unit:

1. Introduction to Financial Concepts
2. Fundraising
3. Earned Income
4. Best Practices for Proposal Writing

Chapter One: Introduction to Financial Concepts

Before we can dive into the nitty-gritty of earning money, we need to have a discussion on the essential terminology and documentation of finance. Once you build the sandbox, you can start... building... castles of money? That's terrible. Moving on.

Two Sections:

A. Introduction to Financial Terminology
B. Introduction to Financial Reports

A. Introduction to Financial Terminology

In order to dive into the different aspects of the finance unit, such as sales, fundraising, etc. we need to first understand some basic terminology and concepts:

A1 — Assets and Liabilities

• Assets — The economic resources that you have. This can include inventory, cash, supplies, furniture, equipment, trademarks, copyrights, patents…

  Anything that adds to the value of the business or can be sold (liquidated) to make money.

• Liabilities — This is what you owe to others. Liabilities include any debt accrued by the business, any money you owe others, loans, credit card bills, rent, mortgages, etc.

  Two types: Current and long-term.

— Of the following examples, which is an asset? Which is a liability? Both?

What are some examples of assets and liabilities in creative practices?

• For an architecture firm specializing in new material applications?
• For a presenting theatre company with a brick-and-mortar location?
• For an independent studio practice that sells primarily through art fairs?
• For a design firm specializing in product design?
• For a touring musical act that plays arena shows?
• For an independent film production?

A2 — Income, Expense, Capital, Debt Financing, Owner's Equity

• Income — Money received for work (sales or services) or capital (raised funds).

• Expenses — A cost incurred in order to operate. There are two main types: fixed and variable.

  • Fixed Expense — Costs that do not change, regardless of changes in sales, production or services. Think of things like rent, union dues, salaries, etc.
  • Variable Expense — Expenses that change unpredictably based on market behavior. Think of things like raw materials, contractor labor, or shipping.

• Capital — The money or wealth needed to produce goods and services. Think of this as the money in your piggy bank. Typically these are funds that were raised, allocated, or that come from some type of investment.

• Debt Financing — Borrowing money without giving up ownership. Think of loans, mortgages, and credit. Debt is a type of Capital

• Owner’s Equity — The value of a company. This can be a tricky concept to understand. Essentially, once you subtract what you owe people (liabilities) from what your resources (assets), what you have left represents some value. That value is the value of the company. It's what the company is worth.

  • OE = Assets - Liabilities
  • Owner’s Equity is a type of Capital

What are some examples of...

• Income?
• An expense?
• Capital?
• Debt financing?
• Owner's Equity?

...for a(n)...

• Architecture firm specializing in new material applications?
• Presenting theatre company with a brick-and-mortar location?
• Independent studio practice that sells primarily through art fairs?
• Design firm specializing in product design?
• Touring musical act that plays arena shows?
• Independent film production?

A3 — Profit, Loss, Cash Flow, Valuation, Appreciation, Depreciation

• Profit and Loss — When your income minus expenses equal a positive number, it’s a profit. When it’s negative, it’s a loss.

• Cash Flow — The monthly movement of funds, including both income and expenses.

• Valuation — The monetary worth of something. Literally, its value. Usually assigned through an appraisal process.

• Appreciation and Depreciation — The increase or decrease in the value of an asset over time.

*Let's analyze a few examples: *

Now, can you provide some examples for a(n)...

• Architecture firm specializing in new material applications?
• Presenting theatre company with a brick-and-mortar location?
• Independent studio practice that sells primarily through art fairs?
• Design firm specializing in product design?
• Touring musical act that plays arena shows?
• Independent film production?

B. Financial Reports

Financial reports are the uniform documents that help you understand the financial health of your business. Financial reporting consists primarily of a few different types of financial statements:

• Balance Sheet (For nonprofits this is called a Statement of Financial Position)

• Income Statement (For nonprofits this is called a Statement of Financial Activities)

• Cash Flow Statement (For nonprofits this is called a Statement of Financial Activities)

In addition to these three primary financial statements, nonprofits also have the Statement of Functional Expenses

B1 — The Balance Sheet

• The balance sheet shows the company’s worth over a specific period of time.
• It is comprised of Assets, Liabilities, and Owner’s Equity
• Ideally: ASSETS = LIABILITIES + EQUITY
• Put another way: What you own (ASSETS) - what you owe (LIABILITIES) = your company’s value and wealth (OWNER’S EQUITY)

B2 — The Income Statement

• The income statement shows both the company’s Income and Expenses over a specific period of time.
• The income statement shows if a company is making a Profit or a Loss.
• The formula is simple: Income - Expenses = Profit (+) or Loss (-)

B3 — The Cash Flow Statement

• The cash flow statement records any money (cash + cash equivalents) that comes in and out over a specific period of time.
• It shows where money is being spent and where it is being gained.

B4 — Statement of Functional Expenses (nonprofit ONLY)

• The Statement of Functional Expenses further breaks out a nonprofit's expenses into three categories:
  • Administration and management — Also called "overhead", these are expenses like salaries, benefits, rent, utilities, etc. that are everyday costs of running the organization and do not have a specific program or purpose.
  • Fundraising — Gotta spend money to make money. Those expenses need to fall here. An example could be the expenses of a fundraising gala.
  • Programs — These are expenses incurred to carry out the mission and purpose of your organization.

Why the extra effort to break out expenses?

• It's a necessary aspect of a nonprofit's annual reporting requirements.

Chapter Two: Fundraising

We're going to discuss four different methods for raising funds. In this topic we'll cover:

A. Debt Financing
B. Investments
C. Gifts
D. Grants

A. Debt Financing

Put simply, debt financing is:

• A way to raise money
• An arrangement where someone gives you money with the expectation of return plus interest.
• The most common type of debt financing is a loan.

Pros:

• You can raise money without having to give up ownership in your business.
• Loan payments are usually predictable and can be planned for.
• You can live beyond your means.

Cons:

• It’s hard to get a good loan without collateral (i.e. assets)
• Loan payments can deplete your cash flow.
• Lenders have no real stake in your success. They just want to get paid.
• In the end, because of interest, you will end up paying more.
• Defaulting (failing to pay) on a loan can have serious consequences such as damaging your credit score or resulting in litigation.

A1 — The Elements of a Loan:

• Collateral — Something pledged as security of a payment.

• Loan Amount — The amount borrowed. This is called the Principal

• Loan term — The amount of time you have to pay the money back.

• Interest Rate — What percentage you’ll pay back in addition to the loan amount (Principal).

  These rates can be:

  • Simple — Never changes. You the same payment every month until the money is paid back.
  • Compounding — Interest upon paid interest+Principal! (Think Student Loans)
  • Variable — Change according to market forces

A2 — Common Types of Loans

• Amortized Loan — A loan with schedule payments that consists of both the principal and the interest.
• Deferred Payment Loan — A loan where the borrower is allowed to have the money immediately, but start to make payments at an agreed upon future date. This is essentially how your student loans work.
• Bond — This is used in investments. You (The investor) loan a company (the bond issuer) the principal and they pay you the interest on a regular basis.
• Line of credit — A preset amount a lender or bank has agreed to give you. You can draw from it when you need it, up to the maximum amount. This is what Credit Cards are for.

B. Investments

B1 — Overview

Investment: Trading a percentage of ownership for money.

Why do people invest in a company?

• To have access to company profits without doing the work.
• To exercise some control over the company.

Why do companies want investors?

• It’s an option to raise funds without resorting to debt financing, selling off assets, or cutting expenses.

B2 — Two common investment situations

1. Equity

• You own a portion of the company, and therefore are entitled to a portion of the profits.
• You are also responsible for a portion of the losses.
• This is common for private companies like Partnerships, LLC’s, S Corps and non-public C Corps

2. Stocks

• If you are a public C Corp, you can sell shares in your company.
• Shareholders control is based on the percentage of shares owned.
• Shareholders are not responsible (or have limited responsibility) for losses.
• This option is only available to publicly traded companies!

The difference between publicly traded stock and equity shares is IMPORTANT…!

C. Gifts

C1 — In General

For our purposes we're going to define gifts as follows:

Gifts: When something of value is given from one party to another without reciprocation.

Who can receive gifts?

• Anyone. The real question is: who gets taxed?

  Gifts to:

  • An individual — The donor pays tax (if the gift is over $15k)
  • A for-profit business — The donor pays the tax (if the gift is over $15k)
  • A not-for-profit organization — Tax-deductible for the donor! Tax-free for the organization!

In most cases in creative practices when we talk about gifts we're talking about tax-deductible donations

C2 — Tax-Deductible Gifts

Tax-deductible gifts fall broadly into two categories:

• Monetary
• In-kind — The donation of physical property or of services.

Types of non-profit gifts:
as classified on financial statements

• Unrestricted — Given to the organization with no real conditions
• Temporarily Restricted — Given for a specific purpose or intent
• Permanently Restricted — Org can’t spend the principal, but any interest the gift generates, they can spend. This is what powers endowments.

D. Grants

D1 — Grant Basics

For our purposes, we're going to define grants the following way:

The transfer of something of value for a specific purpose or particular use.

D2 — Grants vs. Gifts

How are grants different from regular gifts?

• Gifts are non-reciprocal
• Grants require performance
• If you receive a grant for an activity, you must carry out that activity or the funder may ask for the money back.

D3 — Funding Sources

Where do grants come from?
Generally, grants come from three common sources:

• Foundations — A non-profit, charitable organization that award grants to support specific activities.
  • Examples:
    • The Andy Warhol Foundation
    • The Kresge Foundation
    • The Knight Foundation
    • The Guggenheim Foundation
• Corporations — A corporation may dedicate a portion of funds via a subsidiary non-profit to support specific activities.
  • Examples:
    • The Coca-Cola Foundation
    • The PNC Foundation
    • Google Grants
    • Mozilla Foundation
• Government — Tax dollars set aside for specific purposes, awarded as grants.
  • Examples:
    • The National Endowment for the Arts
    • The National Endowment for the Humanities
    • Pennsylvania Council on the Arts
    • Allegheny Regional Asset District

Where does the money come from?
Grant funds are generated in a number of ways. Understanding the difference between the sources of funding can help in determining the scale and scope of a request.

• Foundations
  • From Endowments — A principal, invested amount of money that generates interest every year. That interest is the amount of money that the foundation can use for grants. (A $1m principal produces approx. $50k for grants)
  • From Expendable Gifts — Unlike an endowment, this principal is spent until the money disappears.
  • From Donors — Some foundations have fundraising campaigns to generate the money they use for grants.
• Corporations
  • From business funds, usually profits
• Government
  • From your tax dollars

D4 — Types of Grants

Here are three of the most common types of grants:

• Project/Program Grants — Funds a specific project or supports a distinct program
  • Example: Creative Capital
• General Operating Support — Funds overhead costs like salaries, rent, etc.
  • Example: The Heinz Endowments
• Artist Grants or Fellowships — Grants designed specifically to support an individual’s practice or mission.
  • Such as the MacArthur Foundation Fellows Program

D5 — Receiving Grant Funds

What business structure do I need to get a grant?

• Technically, Any of the business structures we’ve discussed can get grants.
  • Grants to non-profits are by far the most common.
    • Why do you think this is the most common?
  • Grants to for-profits are more common with government grants.
  • Grants to individuals are hard to find, but not uncommon.

How will grant funds affect your taxes? There are different tax considerations for grants based on your business structure:

• Non-profits — Grants are considered non-taxable income
• For-profit — Taxes may apply, but taxable deductions are possible depending on how the funds are spent.
• Individual— Taxes may apply, but taxable deductions are possible depending on how the funds are spent.
• For-profits and individuals via fiscal sponsor — No taxes. You essentially are 'loaned' a non-profit's ability to be tax-free.

Fiscal Sponsorship?
Individuals, partnerships and corporations can receive tax-deductible gifts if they have fiscal sponsorship.

• Fiscal Sponsorship — Sometimes called a fiscal conduit, is when a non-profit org enables you to use their non-profit status, for a fee, to accept donations and apply for grants.
  • Example: Fractured Atlas

D6 — The Grant Proposal Process

Each grant maker is slightly different, but here is the general process:

1. Come up with a fundable idea
2. Seek out funding opportunities
3. If possible, meet with a program officer
4. Apply
5. Send a LOI — Letter of Inquiry
   and/or
6. Respond to an RFP — A Request for Proposals
7. If awarded, carry out the activity
8. Send in a Grant Report documenting project outcomes

Grant-writing tips

We'll go over this more in D.6, but here are some overall tips:
What makes a good grant?

• A strong argument for funding necessity
• Understanding a funder's priorities and goals
• Having clearly articulated goals and outcomes
• Writing for the right audience
• Consistency in language, tone and concept.
• Following the RFP requirements.
• Having a professional budget that matches the proposal narrative

Stewardship

Be a good steward of funding!

• Always act ethically when spending grant funds
• Keep an open dialogue with your program officer
• Invite funders to see the work!
• Credit funders appropriately on programs and signage. Many funders have these requirements in the grant award agreements.
• Follow-up. After completeing a grant and turning in the report, connect with teh pgoram officer to check-in and keep the relationship going.

D7 — Some general tips

1. Most funders don't like taking risks. Start with smaller grants and build that relationship. Once a funder sees you as a good bet, then go big and make the major ask.

2. Relationships with program officers pays off. Their job is to give people money, but remember that they are—in best-case scenarios—your collaborator, not your bank account.

3. Don't get discourages if you fail! Ask for feedback. There are many reasons why you did not get funded—it's not automatically because your idea was bad. You'll only find out by following up for feedback.

4. Apply! You'll never know if you don't try.

Chapter Three: Earned Income

For earned income, we're going to simplify things into two categories: A. Sales and Price B. Services and Fees

A. Sales and Price

This is the first of two units on the concept of earned income. Prior units covered how to raise capital through contributed income (i.e. grants, gifts and—to a degree— investments).

Earned Income Basics

What is earned income?

Earned income is the value delivered to your business that was the direct result of business transaction—the sale of goods and/or services.

How is earned income different from contributed and invested income?

• Earned income is money you’ve literally earned from a transaction. Two or more parties exchanged something of value.
• This income is taxable

» How is this different from contributed income like gifts and grants?

» How is this different from the capital received from investments and loans?

According to the IRS, there are two ways to get earned income:

• You work for someone who pays you

• You own or run a business

  [Source: IRS]

Goods and Services

The majority of earned income comes from the sale of goods and/or services.

• Goods — Property, in a fixed state, that is sold by one party to another for a set price.

• Services — Actions performed by one party for another party, for a set fee.

— What are some examples of goods?

— What are some examples of services?

— Can you think of an example that incorporates both a good and a service?

Let's put this in the context of creative practices. Time to play...

Is it a good? A service? Or both?

• A sculpture
• A film
• An article for a magazine
• Providing vocals at a recording session
• A music license
• A theatrical performance
• A photo shoot for a magazine spread
• Curation of an exhibition
• A film screening
• A design consultation
• An architectural rendering
• Rigging an animated model

Sale and Price

The basics of every sale

— Two basic types of sales:

• Direct — The seller deals directly with the buyer.
• Indirect — A sale made via a third party.
  • Who can think of an example of a third party?
  • What’s the advantage for the third party? (Spoiler: Commission!
  • Always keep in mind who the third party is working for.

— The basic elements of every sale:

• Two or more parties — Who is involved in this sale? *** A consideration** — What is being sold?
• The transfer of goods — When and how is ownership exchanged?
• Evidence of sale — How do we know the sale took place?
• PRICE

— Factors to consider when setting price:

• Value Proposition — What is the promise of value for your good?
• Cost-plus pricing — What is the price beyond cost-to-produce. What is the markup?
• Rarity and demand — How many/much of your good is there? Do people want your good?
• Competitors' pricing — What do your competitors charge? How are your goods similar? How is it different?
• Opportunity cost — By selling this good, what alternatives do you lose out on?
• Tax burden — What taxes will you owe from the sale
• Type of goods — What are you delivering to the buyer? What is the value of that good? Does it come with full IP transfer? Is it just a license?

These factors cannot be considered in a vacuum. In order to create a justifiable and defensible price for your work, you have to take into consideration market value.

The market value of art

Market value is essentially just the amount for which something can be sold on a given market.

In what market are the following items valued and sold?

• Cars
• Stocks
• Cattle
• Music
• Bananas
• Banana hammocks

Determining Market Value

Price for generic goods is primarily set by a market’s supply and demand. In general:

• More demand + less supply = higher prices
• Less demand + more supply = lower prices

But the goods produced by creative practices can range from generic to quite complex. Trying to determine the market value of art can be elusive, confounding, and is often secretive.

— Basic factors for determining the market value of a piece of art: (via Artnet)

• Condition — Is the art in the same condition as when it was made? Has it been altered? Restored? If so, by whom? Has the integrity of the work been maintained?
• Provenance — The sales and acquisition history of an object. How much has it sold for? Who has owned it?
• Comparables — What do similar works (by the same artist) sell for? Within the same medium? Within the same genre?
• Subject Matter — Is the object’s subject matter unique or part of a larger body of work? A genre? A movement? Is it emblematic of an important period or moment of that artist’s career?
• Rarity — The supply. How often and how many works by the artist appear on the market? Is this a singular work, an element of that work, or an edition?
• Demand — Is there a market eager to obtain the work?

Let's take a deeper dive with this video I came across literally yesterday from Christie's Education:

How Artworks Get Their Prices · Artsy

While that video was a good examination of individual price for a work, let's zoom out a bit and examine how the art market operates as a whole:

The Art Market (In Four Parts) · Oscar Boyson

In the second half of our earned income topic, we're going to cover the concept of services and how to set rates and fees.

Service Basics

What is a service?

Let's go back to our definition:

Services — Actions performed by one party for another party, for a set fee.

Let's put this in the context of some creative practices:

Who can give a personal example of a time they've performed a service in a creative practice?

Service Contracts

The parameters of a service agreement should be set forth in a service contract.

— The primary factors to consider in any service contract:

• Scope of work — The service should involve which specific activities? Which activities are not included?
• Deliverables — The specific result of the service. Literally what is delivered to the client upon completion of the service.
• Term — How long do you have to complete the work? What are the deadlines? Are there milestones along the way?
• Support — Who’s responsible for maintaining deliverables? Is the client providing any type of support (i.e. office space, materials, etc.)
• Fee/Rate for service — What do you charge a client?

Setting Fees and Rates

Basically...

*but also... *

But for serious...

— Three main types of fees:

• Flat — One lump sum for the whole project.
• Rate — A fee based on units of time worked. i.e. hourly, daily, etc.
• Variable — Changes based on situations or markets. For example: a sliding scale based on company size.

You can mix and match these different fee types according to the project.

— Factors to consider when setting a fee/rate:

• Value proposition — What is the promise of value for your service?
• Cost-plus pricing— What is the price beyond cost-to-produce. What is the markup?
• Rarity and demand — What is the market for your services?
• Competitors' pricing — What do your competitors charge? How is your service similar? How is it different?
• Opportunity cost — By taking on one client, what alternatives do you lose out on?
• Tax burden — What taxes will you owe from a job? Did you know that contractors pay higher taxes?!
• Type of deliverables — What are you delivering to the client? What is the value of that deliverable? Is it full IP transfer? Is it just a consultation?

Workshop: But At What Cost?!

Chapter 4: Proposal Writing and Budgeting Basics

A quick definition:

Proposals–colloquially called grants–are technical documents that appeal for resources such as money, space, and equipment. source(https://writingcommons.org/open-text/genres/professional-business-and-technical-writing/1245-proposal-writing-basics )

Writing a good proposal

The best advice I can give for preparing a successful proposal is to be organized, clear, and to seek feedback. Grant proposals are judged on a number of factors: clear writing, feasibility of the idea, sensibility of the budget, etc.

The best way to learn is to apply.

...but we're going to cover some tips and best practices.

We're going to use the following case examples throughout this unit:

• An artist applying for a public artwork
• A collective applying for a large music festival
• A designer applying for a community-based, collaborative project
• An artist applying for travel funding to attend a residency
• A small non-profit jumpstarting a new exhibition series
• A large non-profit planning a biennial

Pre-Proposal Steps

1. Analyze resources - What does your creative practice have on hand? What do you need?
2. Set project/program goals — What are you trying to accomplish with this funding? How will it affect your practice and career?
3. Set a timeline — How much time do you have to find funding? How long will the project last?
4. Identify a funder — This could also be the first step, often an RFP can inspire a project or program. The important step here is to match your project to an appropriate fund.

Funding Research

1. Identify the funding stream or likely funder

   • Example: The Foundation Center

2. Look at that funder's cycles and RFPs

   • Example: Creative Capital

3. Check terms and conditions

   • Example: The NEA Art Works program

4. Look at past grants awarded

   • Example: A.W. Mellon

5. Identify connections and program officers

   • The Knight Foundation

Aligning and Translating

Ask yourself the following questions as you prepare your proposal:

1. Do you meet all the RFP requirements?

2. Do you match the organization's goals?

3. Can you 'translate' your project into the language and tone of the funder?

   • Don't automatically change your project, translate your project.

4. What could a long-term relationship with this funder look like?

General Writing Tips

1. Start with your case for funding

• Can you clearly and concisely describe the project/program?
• You should be able to verbally describe your proposal is less than 30 seconds.

2. Create a proposal checklist

3. Write for your audience

4. Write multiple drafts

5. Have peers review and give feedback

6. Check for consistency of language and concepts

7. Run sepllchek

8. Triple check your proposal checklist before submission

9. Create a language bank for the next proposal

Budgets

Format

1. Proposal budgets will typically look like an income statements—they focus on expenses and income.
2. Check to see if your funder has a premade budget template
   • Example: Knight Foundation Budget Template
3. Looking closely at the RFP for budget conditions
   • Example: NEA Art Works
4. Above all, make sure your budget matches your proposal.

General tips

1. Build in items that you may need later
2. Find ways to pay people
3. Don't get greedy
4. Don't be a cheapskate either
5. Consider any in-kind support.

Let's build some budgets!