Teaching private lessons involves more than just practicing your instrument. In addition to keeping your playing skills sharp and staying up-to-date with professional development, you must also pay attention to the business side to ensure your studio's success. Accounting and bookkeeping are often overlooked aspects of running a successful private studio but are crucial for financial stability and growth. Keeping track of your income and expenses, understanding your tax obligations, and maintaining organized records are all vital components contributing to your lessons business's sustainability and profitability.
Proper financial management can help improve your private lesson business.
Proper financial management allows music teachers to make informed decisions that can enhance their business operations. By understanding their financial position, teachers can appropriately price their lessons and services, invest in new resources, and plan for future growth. Effective bookkeeping also ensures that teachers are prepared for tax season, avoid legal complications, and clearly understand their business's financial health. It is essential for attracting potential investors or securing loans if you decide to grow your private lesson business into a music studio or something more extensive.
Contents:
I. Setting Up the Foundation
The basics of accounting and bookkeeping involve recording and organizing all financial transactions, tracking income and expenses, and preparing financial statements. For music lesson teachers, this means keeping a ledger (a record of a business's financial transactions) or using software to keep track of the flow of money in and out of your business. Understanding these principles is the first step to managing finances efficiently. Let's dive into it.
What is the difference between accounting and bookkeeping?
Even though the terms are often used interchangeably, accounting and bookkeeping serve different functions in a business. Bookkeeping is the daily process of recording transactions, categorizing them, and reconciling bank statements. On the other hand, accounting is a more high-level process that uses the information gathered by bookkeeping to produce financial models that you can use for planning and watching trends. It includes analyzing the data, generating reports, and helping with overall strategic planning for the business. With accounting, you can use the data you gather to make intelligent decisions about your business.
It's crucial to maintain accurate financial records for your studio.
Maintaining accurate financial records is not just a legal requirement; it's also critical for tracking the financial performance of your private lesson business. Reliable records enable you to monitor your progress in building or maintaining your studio, plan for the future, and report income accurately on tax returns. Inaccuracies can lead to financial mismanagement, missed opportunities, and severe penalties during audits. Even though it takes extra time and isn't fun, make sure you take that spare time each day/week/month to update your financial records! I recommend setting aside a specific time daily to update your records of who you taught, who has paid and who hasn't, the miles you drove, etc., for the day so it isn't all overwhelming at once.
II. Tracking Income and Expenses
For private music lesson teachers, income can come from various sources, including lessons, performances/recitals, workshops, and maybe even merchandise sales. Tracking these multiple income streams is essential for understanding your profitability as a private lesson teacher and making strategic decisions about where to focus your efforts so you can make the most money possible. Note that this includes tracking for your lesson business only- don't mix your freelancing gigs with your lessons business unless you operate under suitable business structures!
Categorize all expenses.
Expenses in a music teaching business can be diverse, including instrument maintenance, sheet music, travel costs between lessons or schools, and possibly even studio rent. Categorizing these expenses helps you understand where the money is going and make necessary adjustments. It also aids in identifying tax-deductible costs, which can reduce the overall tax burden. Keep receipts and records of all fees you make for your private lesson business! If you use a software program like QuickBooks, you can scan and upload them digitally, which allows you to organize them even more precisely. More on QuickBooks and the like below!
Use software that was specifically created to help track income and expenses.
There are many tools and software available that can simplify the process of tracking income and expenses. These range from basic spreadsheet programs to specialized accounting software for small businesses, like QuickBooks, FreshBooks, and Wave. These tools often come with features like receipt scanning, automatic categorization, and integration with bank accounts, which can save time and reduce errors. I also recommend specific lesson-tracking programs like MyMusicStaff to keep track of your teaching schedule. That way, you can cross-reference what services you've provided in an easy-to-understand format.
III. Budgeting and Financial Planning Creating a budget allows you to anticipate financial needs and manage cash flow effectively. A budget should include all recurring monthly expenses such as rent and utilities of the lessons' space, insurance, and any anticipated income from lessons. By comparing projected figures with actual ones, you can stay on top of your finances and adjust your spending or marketing strategies accordingly.
Don't forget to set aside money for taxes and unexpected expenses.
As a private lesson teacher, you should set aside a portion of your income for taxes to avoid being caught off guard when tax time comes around. If you've taught lessons or freelanced as a musician for years, I'm sure you know exactly what I'm talking about. Creating an emergency fund for unexpected expenses, such as a sudden instrument repair or replacement, can ensure your business operates smoothly without financial difficulties. The current self-employment tax rate at the time of writing is 15.3%. I recommend setting aside that much of each lesson you make into a separate business savings account. I understand that that is a big chunk of your income each time you get paid, but you will appreciate it when April comes around.
Come up with a financial plan for the future of your studio.
Take the time to create a financial plan that encompasses long-term goals and provides a business growth and success roadmap. This might include saving for a studio expansion (or moving into a rented studio if you teach in your home or apartment), investing in high-quality instruments to teach with, or upgrading technology. By setting clear financial targets and timelines, you can work towards these objectives systematically, ensuring your business's future is secure and progressive. When creating your financial plan, be bold and dream big, but back it up with data. Using the data you've been collecting from your accounting, you can come up with attainable goals, with specific KPIs (key performance indicators) that can help guide you to reach your financial goal.
IV. Tax Obligations
Self-employed music teachers must navigate various tax obligations, including income tax, self-employment tax, and possibly state and local taxes. Understanding these responsibilities is crucial to remain compliant with tax laws and take advantage of tax benefits. As always, consult with a tax professional for clarification or any questions.
Deductions, such as office and instrument expenses, are available to music teachers.
Music teachers often qualify for various tax deductions that can lower their taxable income. These may include home office expenses if they teach from home, instrument purchases and maintenance, and costs associated with professional development and travel related to teaching. It can also include sheet music, method books, subscriptions to apps you use in lessons like TonalEnergy, or accessories like rosin or slide oil. If you are hesitant at all, again, consult a tax professional.
Thorough records should support your tax filings.
To support your tax filings and claim legitimate deductions, you must keep thorough records of all your financial transactions related to your private lesson business. This includes receipts, invoices, bank statements, and logs of miles traveled for teaching purposes. Meticulous records not only facilitate the tax preparation process but also provide a solid defense in case of an audit.
V. Invoicing and Payment Processing
Professional invoicing reflects well on your business and helps ensure prompt payments from parents. Invoices should be clear and accurate and include all relevant details, such as the date, services provided, amounts due, and payment terms. Utilizing templates or invoicing software can streamline this process and help maintain consistency. I recommend QuickBooks or MyMusicStaff for easy and professional invoicing. These services even send out invoices automatically at a time that you set! When I use MyMusicStaff, for example, I have it set for invoices to be sent sometime before the 1st of the month. If you are also keeping good track of the lessons you taught and services rendered, this should be simple to set up.
Consider accepting multiple forms of payment.
Diversifying payment options can make it more convenient for students and clients to pay for lessons and may help improve cash flow. While cash and checks are traditional methods, digital platforms like PayPal, Venmo, or Square offer easy and secure ways to receive payments. Some of these platforms also provide additional features like automatic reminders and record-keeping.
It's essential to track receivables and promptly follow up on overdue payments.
Keeping track of receivables (the amount of money due for a good or a service) is crucial for managing your business's cash flow. You should have a system to monitor outstanding invoices and follow up on late payments. This can involve sending polite reminders or arranging payment plans if necessary. Consistent follow-up ensures your business maintains a healthy balance sheet and avoids financial shortfalls.
VI. Importance of Accrual vs. Cash Accounting
Accrual and cash accounting are two fundamental methods that differ in how and when income and expenses are recorded. In cash accounting, transactions are recorded only when cash changes hands. For example, in this method, you would only track the lesson you taught after you have been paid for it. This method is straightforward and gives a clear view of cash flow. On the other hand, accrual accounting records income and expenses when they are earned or incurred, regardless of when the money is received or paid. In this case, you would track the lesson you taught even if the parent hasn't settled yet. This provides a more accurate picture of financial performance over some time but can be more complicated to manage.
Determine which method is best for your private music lesson business.
The choice between cash and accrual accounting depends on the specific needs and preferences of your business and your needs. Cash accounting might suit small, solo operations with straightforward financial transactions. In contrast, if your studio has more complex operations, carries inventory (like books or instrument accessories), or extends lesson credit to students (that's a big one!), the accrual method may provide a better overview of the business's financial health.
There are implications of choosing one method over the other.
The choice between accrual and cash accounting has both tax and management implications. For instance, the cash method can be beneficial for tax purposes if it defers income into the following year. However, accrual accounting may offer more strategic insights for business planning. You as a music teacher need to understand the implications of each method and choose the one that aligns with your business strategy and financial reporting needs.
If I had to choose one method, I believe the accrual method is a better strategy for private lesson studios. This is because what we do needs to be flexible. Often, school schedules change without notice, and suddenly, all of our lessons are canceled for the day, so we need to give those students credit for the next month, even though they have already paid for this month's lesson. Tracking your lessons as they happen (and updating them as you receive payment) seems to be a more logical choice for what we do. That being said, it is up to you to decide whether you want to do cash or accrual counting. Make sure you understand both options first.
VII. Financial Reporting and Analysis
Regular financial reporting is essential for tracking the progress and health of a private music lesson business. Reports such as income statements, balance sheets, and cash flow statements give an overview of the business's financial activities and conditions. These reports can help you understand where your business stands and what areas require attention or improvement. I know I've mentioned QuickBooks many times, but if you use QuickBooks or similar accounting software, you can generate these reports with just a click of a button.
Use them to interpret key financial metrics such as profit margins and revenue growth.
Understanding key financial metrics like profit margins and revenue growth is crucial for making informed business decisions, even for a private lesson studio. Profit margins reveal how much the business is earning above its costs, while revenue growth trends can indicate the success of marketing efforts and the overall demand for your services. Analyzing these metrics allows you to adjust your strategies to increase profitability and growth. In other words, you can use these metrics to get more students and make more money!
Use your analyses to make informed business decisions.
Financial analysis involves using the data from financial reports to make strategic business decisions. For example, if the analysis shows that specific lessons or workshops are more profitable, you might focus more resources on those areas. Conversely, if expenses in a particular category are consistently high, it may be time to find ways to cut costs. Financial analysis is a powerful tool for steering your lesson business in the right direction.
In conclusion, as a private music lesson teacher, you must prioritize accounting and bookkeeping to ensure the financial health of your business. From understanding the basics and tracking income and expenses to managing tax obligations, these practices lay the groundwork for a sustainable and profitable business.
I encourage you to implement robust financial practices, whether through learning the essentials themselves or enlisting the help of professionals. By doing so, you can focus on what you do best- teaching music- while feeling confident that the business side of your operations is under control.
Effective financial management extends beyond the immediate benefits of organization and compliance. It paves the way for long-term growth, financial security, and adaptation to market changes. Investing time and resources into proper accounting and bookkeeping practices can build a strong foundation for your private studio's future success.
Want to connect with Amanda? Leave a comment below or send an email to contact@amandagraceguilfoyle.com.