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MUSIC BIZ INSIGHT #15 Power Reading for Busy Music Professionals Hope you're hungry! MUSIC BIZ INSIGHT is published for musicians, songwriters, managers, label reps, booking agents, entertainment attorneys, studio owners, music publishers, and all others involved in the music business. Its purpose is to help boost your business, find new markets, make the right connections, develop professionally, work smarter and improve your bottom line. "As a general rule, the most successful people in life are those who have the best information." Benjamin Disraeli Published bi-monthly by Peter Spellman, Director MUSIC BUSINESS SOLUTIONS: Turning Music Business Data into Useful Knowledge. Career and Business-building books, articles, consulting and more. P.O. Box 230266, Astor Station, Boston, MA 02123-0266, USA Phone: 978-887-8041 Email: success@mbsolutions.com Website: www.mbsolutions.com © 1997 - 2003, Peter Spellman, Music Business Solutions MBS NEWS & UPDATES Update on "The Merchant Musician: Tool & Tactics for Entrepreneurial Music Success"-- Some of you may be wondering whatever happened to this book I 'm writing. Well, it's still cooking and looking better than ever. It's just that I've decided to publish it with Berklee Press (which has also picked up my previous book, "Music Biz Know-How") and I've been working on updating and expanding the latter book first for a May (re)publication date. I plan on completing "The Merchant Musician" by the end of this summer (1999). So I'm putting the call out again for entrepreneurial profiles of musicians who have started music-related businesses. I already have a few dozen but can also use some more. I need stories from musicians who have started their own music-related businesses--booking agency, magazine or zine, label, music publishing, studio, multimedia company, software, concert promotion, publicity, etc. If you would like to possibly be profiled in this upcoming book, please send me an email and request the "MMQ" (Merchant Musician Questionnaire). You'll be able to answer the questions in a reply email and zip it back to me. Thanks. SEE YOURSELF IN PRINT!!! I'm also looking for leads for a couple of articles I'll be writing for MUSICIAN magazine over the next few months. I'm specifically looking for: - any stories of bands or musicians who've creatively financed a music project (a recording, tour, big show, etc.). In other words, how did you come up with the bread when all traditional sources were dried up? - any stories of bands or musicians who've creatively promoted and marketed themselves in some unusual way. Send your leads with all contact info to peter@mbsolutions.com and thanks! FOR THE LOVE OF LIFE. By now you've probably heard about THE Y2K PROBLEM. It has to do with the fact that.... A lot of the problem goes way beyond fixing PCs and mainframes to "legacy software" and "embedded micro-processers." It's already an accepted fact that a large percentage of the world's computer-controlled devices, switches, locks, controls, etc. will NOT be millennium-ready. At the very least, this will result in disrupted services and utilities (read, "electricity, heat and decent water to drink"). For how long? Most theories range from one week to several months. Regardless, it's going to be a stressful time for us all. One of the most non-alarmist manuals available to help us cope with this impending crisis has been prepared by the folks at the Utne Reader and can be downloaded for free at www.utne.com/y2k/html . I highly recommend you put at least one hour aside each week this year to prepare. It will be time well-invested. QuickCultureFacts:
M A R K Y O U R C A L E N D A R S ! ))) UPCOMING ENTERTAINMENT INDUSTRY EVENTS ((( March 1 Commercial Sound & Video Showcase CSVS. Las Vegas Convention Center Las Vegas. March 8-11 41th Annual NARM Convention. Las Vegas Hilton Hotel Las Vegas. May 13-15 E3Expo(Electronic Entertainment Expo). Los Angeles Convention Center Los Angeles, California 90015. March 12-21 South-by-Southwest Week '99. Austin, Texas. 512-467-7979. March 19-12 International Gaming Business Expo. Sands Expo & Convention Center Las Vegas, Nevada. March 22-23 European Entertainment & Media Forum. Hotel Intercontinental, London, England. Info: Katherine.filby@cor.dowjones.com April 17-22 National Association of Broadcasters (NAB). Las Vegas Convention Center Las Vegas. Apr. 20-20 Billboard International Latin Music Conference & Award, Fontainebleau Hilton & Resort, Miami Beach, FL. F E A T U R E FOURTEEN FINANCIAL GUIDELINES FOR EVERY MUSIC ENTREPRENEUR, PART 1 by Peter Spellman, Director, Music Business Solutions A lot of my work with MBS clients centers around the development of business and marketing strategies which inevitably leads to business planning. Very few of us can start and grow a successful venture without a plan to get us there. One of the big conundrums for those drafting their own plans is the financial aspects. These sections address such critical issues as cash flow, financial projection, profit & loss, and balance sheets. They're also some of the least engaging parts of business planning. Rather than get bogged down in the details of a cash-flow statement (see your accountant for this), I thought I'd present some more "global" aspects of money and business planning &endash; principles to help guide you on the way to effective and efficient financial management. You can use these guidelines as you assemble your own business plan in preparation for a loan or investment formation. Guideline #1: Set Realistic Goals Pinpointing the right size and scope for your start-up business is the essence of a successful blueprint. While every business can begin within a broad range, you eventually reach the extremes when the planned venture is too large or too small. Those who go beyond the reality zone are entrepreneurs who either try to match their venture to their dreams or try to match the venture to their pocketbook. The ambitiously large and grandiose blueprint brings about self-defeat during the planning stage, since the entrepreneur can seldom reconcile the financing needed with the financing available. Rather than lower his or her sights from the desirable to the attainable, the idea is on perpetual hold. These are the dreamers. The danger is not necessarily in thinking big, but in refusing to think smaller by carving a fall-back position that is attainable. I have seen many shoestring entrepreneurs put together six- and seven-figure start-ups, but for every one who can there are ten other entrepreneurs who plan on the same scale only to run into stonewalls. Reality for them is the ability to redesign the venture on a smaller scale. There's an old adage that advises: "You never know what you can afford until you try." It was tailor-made for the start-up entrepreneur. Thinking too small is an appreciably greater danger than thinking too big. While the stubborn dreamer simply doesn't start, the overly cautious entrepreneur finds it easy to start - only to fail. From my viewpoint, the majority of shoestring ventures do fail because they began on too small and unrealistic a scale. The venture simply didn't have enough momentum to get off the ground. It's not necessarily true with service and sideline businesses that can flourish from microscopic beginnings, but it certainly is so with retail ventures dependent upon internally generated profits for survival and growth. The anemic start-up is almost always the creation of the entrepreneur whose plans are based on his pocketbook rather than the profit potential of the venture. What he thinks he can afford overrides the question of what makes sense. So with a few dollars he whips together a few assets and expects it to turn miracles. That's not planning a business but planning a disaster. When is your venture the right size? 1. When it's small enough to be financed. 2. When it's large enough to give you a healthy start. Stay within this range and you have the correct yardstick. Guideline #2: Nail Down Start-up Costs The actual start-up is always the end point of converging costs with financing. While you may have an approximation of what the business will be, you can't seek financing until you have nailed down the cost components of the start-up. Don't proceed with vague ideas of what the business will be. Even a small venture can demand $100,000 or more to be properly capitalized. Conversely, many entrepreneurs overestimate start-up costs because they didn't make the effort to seek lower-cost alternatives. The first step is the preparation of a detailed and itemized schedule of all the beginning assets required. For example, when I help plan a product or retail operation, I divide inventory down into product lines, and can estimate within 5% what the actual beginning inventory will be. It's the same with fixtures and equipment listing even items as small as office supplies. The Small Business Administration (SBA) has prepared an excellent start-up costs worksheet. It lists several start-up costs frequently overlooked. You can obtain it at.... The objective at this point is two-fold. First you want to go through the detailed list of what you think you need and reduce it to what you actually need. There can be a substantial difference. The characteristic of the shoestring venture is that it always begins on a Spartan note, confining assets to the bare essentials. The second objective is to find ways to reduce each item cost to the absolute minimum. This is particularly so with fixtures, equipment, and leasehold improvements where there can be enormous price spreads. "Knowing your costs is the key to financial planning", advises Steve Karmoy, whose first business was a karaoke bar in a resort town. "My original estimates were that it would take $30,000 to equip the bar and another $12,000 to install plumbing, electrical, and leasehold improvements. Another $8000 was budgeted for signs and furniture. The $50,000 price tag came from talking to one fixture supplier, but it's only when I began to shop around that I found ways to cut costs to about $12,000. Used equipment was located for $7000 and the particular store I had in mind offered the plumbing and electrical service with very little additional cost. It's a different ball game when you're trying to put together a $12,000 deal compared to a $50,000 proposition." Legwork is also the science of uncovering unanticipated costs. One dismal story involved a recording engineer who scraped together the assets to put together a successful recording facility in his basement only to be shut down when town officials informed him his residence was not zoned for business. Hidden costs (in this case, relocation costs)are an ever-present problem with manufacturing and technically oriented start-ups who face a host of regulatory requirements. For this reason I always suggest bringing in someone who knows the legal and technical problems that may escape the entrepreneur unexperienced in the industry. The same can be said of marketing costs. All too often an entrepreneur will accurately predict product demand while overlooking the capital really needed to push the product through the available channels of distribution. Lenders and investors may detect a business plan hurriedly rushed together without adequate homework and research. Typically it is a case of not uncovering all the costs or not putting a realistic price tag on them. The well-capitalized firm can cope with a few unanticipated expenditures. Not so with the shoestring enterprise with a taut financial tightrope. Guesswork doesn't count. Know your costs. Guideline #3: Put the Money Where it Counts When you do have limited cash and borrowing power, the objective is to deploy them where it will do the most good. An over expenditure in one area is likely to result in a forced expenditure in another. Balancing investment between "fixed assets" (furniture, fixtures, and equipment) and "working assets" (inventory and working capital) requires special consideration with the start-up enterprise. The successful start-ups throw as much money as possible into the working assets and as little as possible into fixed assets. There are two reasons for this strategy: First, it's the working assets that create the lifeblood for the start-up - sales and cash flow. The second reason is that the carrying costs on expensive fixtures is a fixed cost the struggling venture can well do without. I have seen many start-ups, particularly in the retail trades, with the fanciest fixtures in town and reciprocally the least amount of inventory in town. The lesson is that customers buy inventory not fixtures. My philosophy has always been that I'd rather see twice the inventory on used fixtures instead of half the inventory on spanking-new fixtures. Upgrading the physical plant can always come later when the business is on a more solid plane, but during the start-up stage your money should be in the assets that will work the hardest for you. Guideline #4: Financing is the Sum of its Parts Financing a business is a misnomer. You never finance a business. What you do finance are the individual assets needed for the business. The sum of the parts always produces more financing dollars than could be achieved by financing the whole. Consider financing much as you would a giant jigsaw puzzle-- one small manageable piece at a time. The strategy allows you to exploit each asset for its maximum borrowing power. And you'll be amazed to see how much of the venture is financed once the pieces come together. The conventional financing path on a $100,000 venture is to borrow perhaps $50.000-60,000 from an institutional lender and add the difference from investment capital The shoestring strategy can't follow the conventional niceties. Leverage is putting together every financing block possible to build a total pyramid with few of your own dollars. As you research your financing options, you'll see the various ways to exploit the credit potential of the assets needed in your business. Once you're fully familiar with all the sources of money that can take the place of your own cash, you may find that the available financing blocks come remarkably close to 100% of total start-up costs. Only after you have exploited sources of credit offered by the respective assets should you consider institutional financing. For example, you may line up credit for 90% of the start-up costs through a potpourri of trade credit, barter, leasing, or equipment financing , and be shy the 10% to complete the package and for working capital. Now you can reasonably borrow for these purposes and probably can borrow enough to create a healthy cash reserve. That's one advantage of using bank financing for working capital. And that's when the sum of its parts can exceed the whole. Guideline #5: Building the Best Financial Pyramid Achieving 100% financing - or as close to it as you can reasonably come- is only one part of the strategy. You need a strong financial pyramid, and every building block has its own characteristics - its own advantages and disadvantages. The tradeoffs must be considered both from the point of view of the business and yourself. The ideal financing block will: 1. Provide the longest payback period. 2. Carry the lowest interest rates. 3. Require little or no collateral. 4. Demand no personal liability. No one source of financing will display all these characteristics. Bank loans may give you an adequate payback period, but the downside is your personal liability and tying up the business assets as collateral. Supplier financing ordinarily won't involve personal liability but may require a speedy payback. Partnership funds will satisfy all these points but require you to give up a piece of the action. Considering these conflicting characteristics, the objective is to shape each so that it both makes sense to the business and yourself. For example, I'm risk-consious so I won't take more bank financing than I think the collateral can safely cover. My next objective is to select financing with the longest payback. For the start-up venture, reducing cash flow demands is considerably more important than a slightly higher interest rate or whether the debt is secured. Supplier financing is conventionally short-term, but properly negotiated it may be an excellent source of long-term financing. But at what point is short-term debt still so excessive that you're forced to retrench either to more long-term bank financing or partnership funds with their own inherent disadvantages? It's always a matter of profiling your interests with the business. Understand your priorities before you seek financing. Guideline #6: Navigate by the Numbers Cash flow controls every decision in the start-up process. Cash flow is the name of the game and the only way to navigate during every stage of the start-up. Don't be your own navigator. Preparing a legitimate cash flow projection takes both objectivity and competence. It's the role for your accountant. Your role is to make planning and operational decisions based on what fits within the cash flow framework. A start-up without a carefully planned cash flow statement is a ship without a rudder and a compass. You neither know nor can control where you're heading. It explains why so many small ventures do fail. It's not a matter of being undercapitalized, but in failing to properly plan the undercapitalized operation. While in broad terms the cash flow statement measures project income against the outgo of cash (operating expenses and the pay down of debt), its initial function is to test the viability of the financial pyramid. Only the cash flow statement can tell you whether you're top-heavy on short-term debt, necessitating a switch to more long-term financing. You live by the numbers. "Mastering the entrepreneurial start-up is really a matter of mastering cash flow under the worst circumstances", says David Dube, a management and financial consultant to small firms. "It's a twilight world of constantly trying to get money in so you stay ahead of what you're forced to pay out. When you achieve that constant objective - you survive. When you fail - you sink. It's all in knowing how to go about it". I agree. A cash flow orientation takes the place of even a bottom line orientation during the start-up and survival stages. It's only when you're in the growth and stable periods that decisions can be made to enhance profits instead of cash flow. Entrepreneurs sometimes stumble over this one. They'll start a venture and every decision is directed to profits. Yet the decision that's right for the bottom line may be counter-productive from a cash flow view-point. The two don't always coincide. Only when the business becomes strangled does the entrepreneur become forced to focus on cash flow. By then, however, it may be too late. That's the overview. Start-up economics is the ability to master your own cash flow game. The next several guidelines will show you how. These will be covered in part 2 in the next issue of Music Biz Insight (appearing around March 15, 1999). Get more Music Biz Insights at our archives. )))))) ILLUMINATING TRIVIA (((((( Did you know... ...that prior to 1972, the United States had no law prohibiting the unauthorized reproduction of records? GENRE SPOTLIGHT: FOLK/ACOUSTIC MUSIC INTRODUCTION FOLK MUSIC has always been there, sometimes in the backwash of whatever sounds were fashionable at the time, sometimes itself in fashion. It occasionally would be filed under other categories - country & western, world music, citybilly, hootenanny, coffeehouse music - but it has never been lost. As the century ends, and definitions of cutting-edge popular music take on newer meanings - from hip-hop to dub and drum 'n' bass and beyond- folk music is still a cultural haven. But folk's spectrum has also widened to encompass artists as diverse as Utah Phillips and Ani DiFranco, and numerous musical sub-styles like Americana, No Depression Roots, Y'alternative, and many other acoustic-based world music styles. Perhaps Canadian Garnet Rogers put it best when he said, "folk music is journalism. It has to say something about the human condition and people's lives and how they relate to one another, to themselves or to their jobs." 'Nuff said. MARKET INTELLIGENCE It is difficult to judge the size and success of the folk/acoustic music genre because radio airplay, successful tours, and record sales are not easy to track in this predominately independent world of small concerts, public radio play, and a large percentage of record sales at concerts rather than in stores. Demographics. According to Mediamark Research Inc., approximately 3 million U.S. adults purchased folk music in 1996, with about a 50/50 split between male and female consumers. Folk music audiences are similar to country music audiences in their racial/ethnic makeup, with more than 92% white. Education levels for people liking folk/acoustic music, however, were relatively high. Nearly 40% of the people polled with graduate school education liked folk/acoustic music. The numbers decline in other education levels with 28% of college grads liking folk music all the way down to only 9% of those with grade school education liking folk/acoustic music. Size of market. Hard to determine, but there are some indicators. A typical set of messages distributed on any given day on the Internet's folk_music listserv goes to an estimated 6,000+ readers who include artists, agents, managers, label representatives, distributors, fans, and others. Sing Out! magazine, the oldest of the folk music magazines, is published quarterly and has a distribution of about 13,000 people, 98% of whom describe themselves as musicians and 35% as professional or semi-professional musicians. If these numbers are indicative of the larger scene, the number of people with an official (professional or business) connection to folk/acoustic music must number more than 20,000. This number does not even include the people who simply listen to the music. The audience for this music is strong and growing. Acoustic and folk communities are well-known for their long-term commitment to the artists and the music they love. Fed up with the excesses of computerized music, many newer arrivals are looking for a more rootsy sound in music. I suppose this translates into a search for a more "human" sound and expression. For sure, techno has its limits. FOLK/ACOUSTIC MUSIC MARKETING INLETS & OUTLETS Top 6 U.S. Folk/Acoustic Radio Programs Listened to Prairie Home Companion Mountain Stage Thistle & Shamrock Folk Sampler E-Town Acoustic Cafe Top 5 Folk/Acoustic Music Publications Folk Alliance Newsletter Dirty Linen Sing Out! Performing Songwriter Acoustic Guitar Top 6 Folk/Acoustic Music Listservs or Newsgroups (If you're interested, here is a fairly complete directory of music-related mailing lists)
SEE ALSO -- this sort of "grand central station" of folk music-related lists. KEY FOLK/ACOUSTIC MUSIC ORGANIZATION: The North American Folk Music and Dance Alliance. Among the different kinds of music that the Folk Alliance supports under its broad umbrella are traditional folk, singer-songwriter music, acoustic music, country blues, jug bands, balladeers, newgrass, folk rock, Jewish, Greek, Bosnian, and Caribbean music, and more. FOLK MUSIC BOOKMARKS CROSSROADS "The acoustic, folk, roots & world music resource for radio, retail, labels & artists" ENGLISH FOLK AND TRADITIONAL MUSIC ON THE INTERNET: A GUIDE TO RESOURCES is a guide to the most useful Internet sites for anyone interested in English folk music. Topics covered include: General guides, Definitions, Organizations, Libraries, archives and museums, Academic research, Magazines and journals, Discographies and bibliographies, Songs, tunes and dances, Instruments,Specific genres, Events, Artists, Commercial sites: record companies, publishers, retailers and artists' agents, Regional resources and more! Its mission? To present a comprehensive collection of information of interest to the folk and acoustic music community in an organized and efficient manner. Well done. FOLK SONGS The Digital Tradition Folk Song Database THE FOLK MUSIC HOME PAGE Huge folk music jump site with categories for: Artists, Concerts and Events, Albums, Lyrics, and Songs, Organizations, Politics, Folk Instruments, Folk music from different regions, Venues, Stores and Services, Record Labels, Catalogues, Promotion, Booking, Radio, Books and Magazines, Electronic Mailing Lists, FTP Sites, and Usenet Newsgroups. The Folk & Acoustic Music Exchange. Features album reviews of new releases by folk and acoustic artists. READS & RESOURCES BOOK: Small Time Operator: How to Start Your Own Business, Keep Your Books, Pay Your Taxes and Stay Out of Trouble ($16.95) and 422 Tax Deductions for Businesses & Self-Employed Individuals ($16.95) by Bernard B. Kamoroff, 23rd ed. (Bell Springs Publishing, P.O. Box 1240, Willits, CA 95490; Book orders: 800-515-8050). Now in its umpteenth printing, "Small Time Operator" is the one book I recommend on the financial aspects of running a small business. Its numerous editions keep the book's content current amid the fluctuations of the economy and its tax laws. Samples and illustrations help demystify such arcane accounting terms as "accruals," "depreciation," "recapture rules," and "uniform capitalization." For a nuts & bolts primer on money and small business management, it can't be beat. "422 Tax Deductions" is a welcome supplement to "Small Time Operator." You're gonna keep more of your earned money by referring to this handbook, guaranteed. WEBSITES: Over a dozen sample contracts to help with your legal needs in the music and entertainment world. But don't just cop the contract and seal a deal. Be sure to run it by an experienced entertainment attorney first! See MusicBizInsight #5 in the archives for guidelines on choosing an entertainment lawyer. The Business Marketing Association The Business Marketing Association (BMA), an organization for business-to-business marketing and communications, hosts a site (600 files at press time and growing) with data for those engaged in marketing and marketing communications. Users will value the BMA's library of industry surveys, newsletter articles, and reports; access to the free B2B Direct e-mail newsletter (a gem!); and an online survey to compare marketing opinions. The site also includes information about professional certification, the benefits of membership, and other resources for the professional communicator. Did you know that MBS offers both music career and business consulting and career-building publications? Check out the MBS website for lots of other resources. Discover some powerful tools and leads to help you grow your music career and business! TO SUBSCRIBE to MUSIC BIZ INSIGHT: To subscribe just send email with the following message in the body, "subscribe" to success@mbsolutions.com It's not an autoresponder so feel free to include any other comments, ideas, suggestions, etc. you may have. About the Publisher PETER SPELLMAN is Director of MUSIC BUSINESS SOLUTIONS, a business and marketing consultancy to the music industry, and Director of Career Development at Berklee College of Music, Boston. He is the author of several books for music entrepreneurs and teaches music industry courses at Northeastern University (Boston) and the University of Massachusetts (Lowell). A musician since he was ten, Peter continues to spin riddims in the improvisational collective, Friend Planet and sing Cat Stevens' songs to his kids every night before bed. BLOOM WHERE YOU'RE PLANTED! Quote of the Month-- "After silence, that which comes nearest to expressing the inexpressible is music." --Aldous Huxley E-mail: success@mbsolutions.com © 1997 - 2003, Peter Spellman, MBS Business Media, www.mbsolutions.com P.O. Box 230266, Boston MA 02123-0266 978-887-8041 Rise up!
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