Archive for the ‘Accounting’ Category

Vh1’s Behind the Music Presents: Sound Accounting

Wednesday, June 17th, 2009
Greg Suhocki asked:

What do AC/DC, Busta Rhymes, Justin Timberlake, and the Philadilphia Orchestra all have in common? Each has major record company contracts; each incurs costs and revenues, from touring, record sales, and merchandise sales; and each has to deal with Federal and State Tax Regulations. However, the rules do not apply to only celebrities, but also to “weekend” musicians. “Weekend” musicians are tagged as those who usually sign with an independent label. By analyzing different costs, sources of income, and sources of revenue which musicians and record companies accrue, the need for accountants in the music industry can be established and clearly evaluated.

First off, it should be noted that substantial differences exist between major record label companies and privately owned record companies (independent labels). When artists sign contracts with major record companies, commitments include recording six to eight albums. Large record companies, such as Sony, Warner Brothers, Columbia, and Universal, invest millions into the touring, recording, and producing of an artist. This being said, it seems as if the performer is living the dream, which very well may be the case. Yet, artists’ royalties are disbursed after recording costs, advance pay backs, and other expenses have been taken into account. According to music industry lawyer Dan Engel, royalties are based on complex formulas often favoring the company, leading to audit detections of 10%-40% underpay of royalties. This is just one of the many reasons more rising artists are signing with independent labels, calling for a greater number of independent label accountants.

Today, writing and recording professional sounding music does not require a $50,000 lease of a Los Angeles studio. Technology is advancing extremely fast, allowing personal computer software, such as Pro Tools or Tracktion, to generate music identical to million dollar recordings. Home studios are more efficient and accessible, letting musicians to easily promote and sell their music, if not sign with an independent label. Regardless of the label company size, accountants help the touring and recording life of a musician run smoothly.

There are three types of common costs which every music industry, major or independent, must take into account. First and foremost are the recording costs. These usually range from studio rental costs, engineering fees, producer fees, side-musician fees, and the cost of a publishing license. Next are the duplication costs. While duplication costs focus primarily on tracking the quantity of compact discs manufactured, costs for artwork, graphic design, and photo shoots should also be recorded. It is also important to recognize any costs of uploading music to the internet, known as virtual distribution costs (itunes, mp3, cdbaby). Last, but not least, are promotional expenses. Poster costs, radio program fees, and web ads all play a part in promotional outlay. As a side note, music industry accounts often deal with label companies that charge a commission on the sale of a compact disc or purchasable download, instead of charging for recording, duplication, or promotional costs.

An integral part of accounting of musicians includes touring and gigging expenses. Touring is essentially the beating heart of a musician’s work. For this reason it is crucial that music industry accountants focus on tour accounting. Certain cost drivers, such as all road activity (bus and truck miles), need to be estimated via expense receipts. When working with tour accounting it is important to maintain regular correspondence with tour managers and booking agents and to ensure proper “road” cash management by tracking performance income and performance or “gig” deposits.

Income is recorded by music industry accountants from a number of sources. First off, income (for the artist(s)) and revenue (for the label) is accounted for through the sale of the music. The source could be a distribution store or through the internet. Other sources of income include “sync” deals. Through “sync” deals, income and revenue is received because the music was used in television, video games, or movies. Lastly, income and revenue is also accounted for through ticket sales, merchandise sales, and endorsements.

Whether it is a major record label company or an independent company, all music industry accountants partake in similar duties. Accounting for costs, income, and revenue in a musician’s world is fascinating because of the different sources of cash flows. Publishing, recording, merchandising, and touring are the bread and butter of a musician’s way of life. It is up to music industry accountants, better known as “sound accountants,” to organize cash flows and partake in regular correspondence with tour managers and booking agencies to ensure accurate accounting of costs, income, and revenue. No matter the form of entertainment (music, movies, sports, etc.) accountants are always needed to help the show stay on the road.