FINANCIAL MANAGEMENT

At CAKI, we have designed a WIKI around financial management. You will find the WIKI at the bottom of the page. Gain insight into core concepts and other relevant basic knowledge regarding economics through CAKI’s economics WIKI. We hope the WIKI can better equip you and other startups to begin financial management of your businesses.

In addition, we have uploaded links to other places where you can get knowledge about how to book, make accounts, find your way in tax and VAT, etc. These can be found at the bottom of the boxes to the right.

Accounting

A financial statement is an overview of the financial activities that have occurred in a company or project. A financial statement is a report that describes how the company has performed financially in a delimited and completed period.

You always need to prepare an annual report in your company when submitting information to Skat (the Danish Customs and Tax Administration). It can also be helpful to prepare a half-year report or quarterly report for your business.

Financial statements are prepared on the basis of your bookkeeping.

Statutory requirements

If you have a company, it is the annual report that shows all the financial activities the company has had over the course of the year.

Types of financial statements

There are a number of different financial statements:

Internal financial statements: Period report and Annual report

External financial statements: Quarterly report, Half-year report and Annual report

Tax report

VAT report

Accounting system

It is a good idea to systematise your financial management and establish routines for your bookkeeping and preparation of financial statements.

This allows you to stay up to date on your company’s or project’s finances.

By having fixed routines, you also make sure that things get done. Many people have a tendency to postpone bookkeeping, VAT accounting, etc. until the last minute. This is a bad idea for several reasons that you are probably already aware of. You should therefore make sure to regularly update your accounts based on your bookkeeping – ideally once a month.

The accounting system you use specifies your practices for issuing invoices, posting expenses, settling VAT, preparing annual reports, etc.

The accounting system can be one you have made yourself and which you regularly update and maintain or one you have paid for. For example, you can subscribe to an online accounting programme that you use yourself or hire an accountant who does the work for you.

Your accounting system should be compatible with the activities in your business or your project and meet your specific needs. That is why it could also be anything from an Excel sheet to an accounting system you have purchased or subscribed to.

When choosing an accounting system, it, therefore, makes sense to try out a few different solutions and experience the different ways with which to deal with financial management. This will allow you to decide what works best for you. 

Artist VAT

Artist VAT is a special type of VAT applied to certain original artworks, productions and services.

Some students in artistic programmes need to register their company with a CVR number (CRN). You may therefore encounter students who need information about the VAT rules that apply for the type of artistic enterprise they have. The rules for VAT registration and payroll taxes are part of what one needs to be aware of when registering a company.

Read more about VAT, artist VAT and payroll taxes in CAKI’s Mini-guide here.

Assets

Assets are the company’s holdings.

Assets make up everything of value the company owns. For example, this includes cash, materials, inventories and receivables.

An asset overview accordingly shows where the company has placed its money. An accountant will refer to this as the company’s investments.

Assets are divided into fixed and current assets.

Current assets

Current assets are assets that a company expects to have realised, resold or consumed within one year.

Fixed assets

Fixed assets are assets that are current for a long time in a company; they make up what has been invested in the company.

Often, these are divided into tangible, intangible and financial assets. These distinctions are made because there are differences in how they should be made up and factored into the financial statement.

Tangible fixed assets

Tangible fixed assets could include machinery (computer, copier, sewing machine…) or buildings.

Intangible fixed assets

Intangible fixed assets are non-physical and non-financial assets obtained for use in the company. Examples of such assets include goodwill, trademarks, patents, etc.

Financial fixed assets

The third form of fixed assets is financial. Financial fixed assets can be the various types of securities, equity investments and loan types to subsidiaries – generally monetary assets.
Financial fixed assets generally have a maturity of at least one year.

Fixed assets and bookkeeping

Your fixed asset should be entered under the assets in the balance sheet with the full amount. You then write off the asset in the balance sheet and income statement, either monthly or annually, until the asset has been completely written off. This ensures that the value is distributed over a period and constantly updated.

Financial assets are not usually subject to ordinary depreciation rules, as the value of financial investment does not necessarily decrease over time.

Balance

Combined, assets and liabilities result in a balance (assets minus liabilities). A balance is therefore a calculation of the company’s assets and liabilities at a given point in time. It is also what is stated on the form describing debit and credit:

The balance shows the company’s:

  • Assets
  • Liabilities
  • Equity

The valuation of the company’s assets can to a great extent be subject to estimates, and the balance sheet sum will depend on the chosen valuation of the assets. 

Bookkeeping

Bookkeeping is the foundation of your financial management.

Your bookkeeping is the tool you use to collect and systematise your accounting records. Every single financial transaction results in an accounting record. Bookkeeping is your system for how you collect and systematise your accounting records.

Your bookkeeping is also the basis for ensuring that you always have the ability to determine the state of your finances.

Bookkeeping also gives you an overview of the company’s liquidity. When bookkeeping, you should use the method called ‘Double-entry bookkeeping’. You can read more about Double-entry bookkeeping elsewhere in the wiki.

You can do your bookkeeping in an Excel sheet or in a bookkeeping system.

Chart of accounts

The starting point for double-entry bookkeeping is that financial transactions are divided according to their nature into a number of categories, each of which is entered into an account. This means that you enter income and expenses across a number of accounts systematised according to the type of income or expense the account represents in the company (read more about entries in ‘Double-entry bookkeeping’ and ‘Debit and credit’.

In order to create a system and overview of your accounts, you create a chart of accounts. You choose yourself what numbers your accounts should be identified as, but for simplicity’s sake, you should choose a simple and consecutive order. There is no requirement to set up a specific number of accounts. This depends on the concrete situation and each individual business.

All your bookkeeping accounts will collectively constitute what is called a chart of accounts.

All accounts in your chart of accounts fall under one of the five main accounting groups:

Expenses: Consumption for the current year

Income: Income for the current year

Assets: Money, receivables, inventories, machinery, buildings, etc. at your disposal.

Liabilities: Debt owed to borrowers and owners (equity)

Equity: The value of the part of the company’s assets that are not financed by borrowed capital

 

Each account is divided into a debit and credit side, which are kept as follows:

Inflows to an asset or expense account are posted on the debit side, while outflows are posted on the credit side.

Inflows to a liability or income account are posted on the credit side, while outflows are posted on the debit side.

The balance on an account is found by summing up all the debit entries and credit entries, respectively, and deducting the smallest sum from the largest. The balance is the resulting remainder.

You can download an example of a chart of accounts from the Download box on this page.

Debit and credit

‘Debit’ and ‘credit’ are accounting terms used in bookkeeping.

In order to use debit and credit correctly, you need to know which accounts are debit accounts and which are credit accounts.

You can see that here:

Debit is used when money goes into a debit account.

If you remove money from a debit account, the money needs to be credited from a debit account.

Credit is used for a credit account that receives money.

If you are taking money out of a credit account, you would therefore debit the amount.

Examples of debit and credit in bookkeeping

You buy paint for DKK 400, and you pay for it with money from your business account.

You now have to enter a sum on two accounts: ‘Cash’ and ‘Inventory’.

‘Cash’ represents the company’s cash reserves. It is therefore an asset, making it a debit account.

If you have to decrease the balance of the account as in this case, where you are taking money out of the account, you, therefore, need to credit (see the above table).

‘Inventory’ is also an asset account, as the materials constitute an asset in the company. As a purchase of materials results in a value increase in the company’s inventory, the account ‘Inventory’ should therefore be debited.

 

If VAT needs to be included, things look a bit differently.

When including VAT in the entries, the bookkeeping looks as follows:

DKK 500 has been taken out of the cash account (credit). The money has been entered as an expense on the account ‘Materials’ (DKK 400 debit), and the VAT amount has been posted as a receivable on the account ‘Input VAT’ (DKK 100 debit).

Depreciations

When a company purchases a fixed asset, it needs to be factored into the company’s accounts as an asset.

The asset needs to be depreciated in accordance with the lifespan of the asset. For example, a PC will have a shorter lifespan than a car and will therefore depreciate faster.

Three ways to depreciate: linear, digressive and progressive

  • Linear depreciation is the most commonly used method and entails writing off equal parts of the value over a number of years
  • Digressive means that the depreciation declines over time
  • Progressive means that the depreciation increases over time

The reason why assets have to be depreciated is that the real value of the assets will thereby fit with what has been factored into the accounts, giving an accurate picture of the company’s value as a whole.

Usually, intangible assets have a long depreciation period. However, one can end up in a situation – such as during the Great Financial Crisis – where a company’s goodwill disappears and is accordingly depreciated to zero.

Intangible fixed assets are non-physical and non-financial assets obtained for use in the company. Examples of such assets include goodwill, trademarks, patents, etc.

Double-entry bookkeeping

The terms debit and credit are part of the system called Double-entry bookkeeping. This may sound like an exotic term, but in practice, it’s really just about making sure you always post a voucher in both debit and credit so that the posting adds up to 0.

The double-entry bookkeeping system thereby entails that every financial transaction results in at least two entries in the accounts – a debit entry and a credit entry.

If, for example, you purchase an item in cash and add it to your company’s inventory, you would have to record a debit to inventory (an asset account) and record a credit to cash (an asset account).

It is not important in this context whether the debit and credit amounts are divided over an equal number of accounts. What matters is that when examining the accounts as a whole, the sum of balances for all credit columns must equal the sum of balances for all debit columns.

Regardless of how many transactions have been posted, the value of your debit and credit balances should be equal. This is the key to the ‘magic’ of double-entry bookkeeping: that the sum of all debit columns produces the same result as the sum of all credit columns. If this is not the case, there has been a bookkeeping error.

Double-entry bookkeeping thereby has a built-in control mechanism in the sense that the sum of all debit balances should correspond to the sum of all credit balances. If this is not the case, there has been a bookkeeping error. In other words, the system has a built-in control mechanism.

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­­Model: Marianne Zander Svenningsen, Zander Advice

Trivia from Wiki:

Double-entry bookkeeping is a method that stems from Italy, where it was developed by merchants and bankers.

The oldest description of the double-entry bookkeeping method is found in a book written by the Italian Franciscan friar Luca Pacioli in 1494. The book is entitled Summa de arithmetica, geometrica, proportioni et proportionalita. 

Pacioli describes double-entry bookkeeping as a method that is already known, and examples have also been found of bookkeeping following the double-entry bookkeeping method dating as far back as the early 13th century.

Pacioli’s book reviews how to efficiently perform calculations with the new numerals – Arabic numerals, which at the time were being introduced in Europe. Because a lot of calculation is associated with bookkeeping, he found it appropriate to also include a meticulous description of the double-entry bookkeeping method, which at the time was so thoroughly tested that only minor changes have been made to the method since then.

Equity

Equity represents the value of the company.

Equity is essentially the result of subtracting the sum of the company’s assets from the sum of its liabilities. Liabilities are made up of provisions and debt.

Equity consists of different parts that are made up each year in connection with the preparation of the annual report. A so-called equity statement is prepared in connection with the report. 

The equity that is part of the balance sheet is increased with the portion of the year’s profit that is not paid out to shareholders. Similarly, the company’s equity will decline if the company ends up with a loss for the financial year.

The profit statement, therefore, provides an overview of income and expenses over the course of the fiscal year, while the balance sheet provides an overview of the company’s overall value throughout the years at a given time (year-end date).

Income statement

An income statement is a calculation of a company’s result over a period, i.e. earnings within a delimited period.

Income and expenses make up the result of the operating accounts (income minus expenses) for the current period. You can also see this in the form describing debit and credit:

The income statement shows the company’s:

  • Income
  • Expenses
  • Profit/loss

How you set up the income statement and what designations you use will be determined by the type of activities you have in your business.

EXAMPLE:

Liabilities

Liabilities show the company’s raised capital, i.e. how the company is financed.

A company’s liabilities thereby allow you to understand everything that’s financing the assets, including equity, overdrafts, trade creditors and long-term loans.

Liabilities are divided into equity, provisions and debt.

Equity is the result of the difference between the value of the company’s assets on the one hand and the company’s debt and provisions on the other.

The overall debt includes debt, provisions and contingent liabilities.

A contingent liability is one of several expenses that have not yet been incurred and are not already factored into the accounts. In other words, a contingent liability is not yet an obligation for the company, and it is therefore uncertain whether it is something the company will have to pay.

Contingent liabilities are not shown in the balance sheet.

EXAMPEL:

Liquidity

A company’s liquidity gives an indication of its financial condition and shows the extent to which the company is able to pay its short-term debt obligations (expenses).

In other words, liquidity shows how much capital a company has available; it is the ratio between current assets to short-term debt.

Current assets include cash reserves and other assets that can be converted into cash.

Liquidity can also be used to describe a market as either a buyer’s market or a seller’s market. High liquidity in a market means that the turnover of goods is high, and there will typically be small price differences between the sellers in the market. This is called a seller’s market. On the other hand, a low liquidity market is referred to as a buyer’s market. In a buyer’ market, sellers will typically struggle to obtain higher prices for their products.

Tax

As a lecturer, you may get students asking questions about the taxation of their artistic practices or enterprises. This may be the case whether you have a CVR number (CRN) or if you are working without a registered business.

As a self-employed person working in the arts, it is likely that you will have both an A and B income and have to pay both A and B taxes. You may also be liable for corporate taxes or dividend taxes. You can find more information about all of the above in CAKI’s Mini-guide to taxes here.

VAT

As a lecturer, you may get students asking questions about the taxation of their artistic practices or enterprises. This may be the case whether you have a CVR number (CRN) or if you are working without a registered business.

As a self-employed person working in the arts, it is likely that you will have both an A and B income and have to pay both A and B taxes. You may also be liable for corporate taxes or dividend taxes. You can find more information about all of the above in CAKI’s Mini-guide to taxes here.

GET CAKI’S MINIGUIDES HERE

CAKI Miniguide for VAT and Artist VAT

CAKI Miniguide for tax

CAKI has published a number of publications and mini-guides to help you start your artistic business. You can read about the start-up, fundraising, portfolio and much more.

SEE PUBLICATIONS
SEE MINIGUIDES

Helpful external releases

In the publication ‘Get control of the hassle’ you get a guide on how to work with bookkeeping and accounting in smaller companies:

Get control of the hassle

As an artist, it can sometimes be difficult to place your income in line with the standards of tax law. ‘The Artist’s Taxation’ is a guide that guides you through the tax rules with a sure and loving hand:

Artists’ Taxation 2020

Unique works of art are subject to special rules for VAT. The Association of Visual Artists has written this guide, which describes VAT registration, ordinary VAT and artist VAT:

BKF guide: Artist VAT

And remember: you are always welcome to get personal advice at CAKI when there are questions about finances that you find difficult.