Financial Literacy for Musicians

Financial literacy is a topic that has been one of the main focuses on the Entertainment Business Finance course I’m taking this month from Full Sail University. It’s extremely important to understand the basic financial concepts of opportunity cost and breaking even in order to make sound financial decisions.

Since more musicians are opting to remain independent these days, it is incredibly important for them to learn the financial basics as well in order to make their jobs easier. Independent artists do not have record labels and accountants to take care of the numbers so learning a little about finance can go a long way.

Thanks to technology, recording costs can be cut down by several hundreds of dollars. A decent recording can be made with Apple software; many consumers already own a Mac so that decreases the costs of recording further. A band starting out doesn’t have $1,200 to record a demo or album in a studio and have it mastered by a professional producer. A friend of mine in a two-piece hardcore band paid a producer around $900 to master and edit their demo and they had more trouble than it was worth. Needless to say, the producer was unprofessional and they didn’t get exactly what they wanted out of the experience.

So when a band wants to make a recording, they need to weigh their options to ensure they make the best decision. The opportunity cost of going to a professional studio is the financial expense it costs for recording time, editing, and mastering. Say it costs $1,200 for the entire project, this is $1,200 less that the band has to use for other things like touring, marketing, and merchandise expenses. Could that $1,200 be used better for something else?

When a band decides they are ready to go into the studio and spend $1,200, they need to figure out how long it will take to break even on the project. In other words, they need to understand how many albums they are going to have to sell to break even, and then turn a profit. This could be figured out by using the formula Q = Fixed Costs / (Price – Variable Cost per unit).

The fixed cost in this scenario is the $1,200. A reasonable price for an album of a band starting out is around $5. If it cost the band $3 per CD to make each one, the situation would look like this:

Q = $1200 / (5-3)

Q = $1200 / 2

Q = 600 albums

The band would have to sell 600 albums at $5 in order to make their initial $1200 investment back. Anything above 600 albums would be the band’s profit. There are ways to break even sooner, which include charging a higher price for the album and reducing the initial fixed cost of recording. There are several factors to consider and once you begin to understand these concepts, it’ll be easier to decide what decisions should be made and which ones that can wait until you have a larger fan base.

Adelman, P. J., & Marks, A. M. (2007). Entrepreneurial Finance (4th ed.). Upper Saddle River, N.J.: Pearson Prentice Hall.

Kiyosaki, R. T. (2000). RICH DAD POOR DAD. NY: Warner Books.

Money Music 101: Why Teach Basic Finance Skills To Musicians?. (n.d.). Money Music 101. Retrieved May 19, 2012, from http://www.moneymusic101.com/2010/04/why-teach-basic-finance-skills-to.html