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Understanding Your Cost of Doing Business

Published: 09/04/2019

Do you know what your daily cost of doing business is?

It’s an important piece of information to have and to understand. Often, we think about the photography aspect of our business--after all, that’s the fun stuff. We love to learn new techniques and love to get new gear and do the research to make sure we are buying the best tool for the job. But what good is all of that if you don’t know how profitable your business is?

In this blog post, I want to talk a little about understanding your costs. This material is covered at length in my tutorial series, and I feel it's a very valuable topic for business owners; I want to share it with the PFRE community. We are self-employed after all, and we need to know what our business is doing if we are going to stay in business long-term.

To start with, I want to talk about a few important concepts to frame the discussion because I don’t hear or read about this often enough in the various discussion groups that I visit frequently:

  1. Your salary is an expense to your business.
    You need to consider yourself as an employee of your business, regardless of how you pay yourself. In an ideal world, your business would be very profitable and you can therefore pay yourself a fixed salary at a regular interval. If you are already doing that, then you're ahead of the curve. If your business is more volatile than that, that's okay. You can just pay yourself a reasonable wage for the work you do. Just make sure that you leave some money in your business account because:
  2. Your salary and your profit are two different things.
    You need to pay yourself, pay your other expenses, and then there should be money leftover in your business bank account for every photoshoot you do. If you don’t have profit, you don’t own a business. You just own your job. There are a lot of things you can do with profit and it's important to aim for a target beyond your income needs to make a living. With profit, for example, you can buy that new camera you want without dipping into your take-home pay. You can make a lump sum deposit into your retirement account. You can reinvest into your business in a number of ways. Wouldn't it be awesome to have a legitimate marketing budget? Wouldn't it be nice to pay yourself a year-end bonus and take your kids to Disney World? With profit, you can decide what to do with the leftover funds freely without having to worry about your personal expenses being covered. If you build a team of photographers to service your market and one day decide to sell your business, if you don't have profit, you're going to have a hard time selling your business. Nobody wants to buy a break-even endeavor. So to be profitable in your business, your rates must be higher than what you need to cover your income requirements and your expenses.
  3. Budget!
    You need to have one. It doesn’t have to be complicated, but you do need to have a grasp on what your expenses are and a target to hit each month on both sides of the equation: income vs. expenses. Now that you are thinking of your income/salary as an expense to your business, then the concept and purpose of the budget is very simple. All of your revenue, minus all of your expenses (including your salary), equals your profit. If you aren't paying attention, your profit will run away from you, fast!

Okay, with those concepts out of the way, let’s talk about why this is so important to you.

Have you ever wondered how much to charge for your photography? That’s not an easy question to answer. I’ll give you a hint--if you are setting your prices based on what your competitors are charging, you are off to a bad start. Sure, it’s important to consider your competitive landscape and your market conditions but don’t make the mistake of basing your rates on external sources.

Your rates need to:

  • pay for your time.
  • pay for your expertise/talent/creative sensibilities.
  • pay for your mileage and wear and tear on your vehicle.
  • pay for wear and tear on your equipment.
  • pay a fair rate for the actual value of the photos you deliver.
  • leave a little leftover for profit.

The Goal: To understand all of your costs and break them down into a daily cost of doing business (CODB). With a daily CODB clearly identified, you can then back into your income goals to determine how many shoots per day you need to book and how much you need to charge to sustain your business and hit your income goals.

I outlined the reasoning and the goal behind setting a budget for your business and made a clear distinction between your salary and your profit in your business. I also outlined what a healthy profit in your business can do for you.  Now, let's take a closer look at how to make a budget for your business. It's a very simple process. I have broken it down to 7 easy steps, and when you're done with it, you will have a firm grasp on what your rates need to be and how often you will need to shoot in order to meet your income goals. Let's dive in!

I find it easiest to make a spreadsheet, but even pen and paper can work just as well. As long as you’re doing the exercise, you’re already ahead of the curve.

1. Add up your expenses.

First, get your bank statement for your business. If you can, get the last few months’ statements. Go through line by line and write down each of your expenses. Group similar expenses into categories if needed, to keep things organized and simple. Tally up all of your expenses for one month into one total number.

Note: We have some pretty large expenses that are NOT a part of our business. Things like our tax liability, mortgage/rent payment, health insurance premiums, etc. Optionally, I recommend adding those large personal expenses to the budget too. By adding other large expenses that we have outside of our business, we can have the peace of mind knowing that our daily CODB also includes other large expenses that we care about. This will blur the lines between business and personal finances, but that’s okay for the purpose of this exercise. The outcome of this exercise is to understand what our rates need to be in order to make the living we want and how often we need to book shoots to achieve our income goals. You can run this exercise more than once, and include/exclude these personal expenses as you see fit.

2. How much do you work?

Determine how many days per year you work. And by “work”, I mean billable work. That is, any days that you have scheduled photo shoots for which you send an invoice.

Tip: Approximately 240 days per year would be considered a normal full time workload. That accounts for working 5 days per week, with three weeks of vacation/personal/sick time off. If you aren't sure how many days per year you tend to work, then use 240 days as a starting point for making an estimate.

3. How much money do you want to earn?

Now, decide what your income goal is for the year. You can make this number up. How much did you make last year? How much more do you want to make this year? Keep it realistic but don’t be afraid to aim for a goal. You can run these numbers as many different ways as you want. In my example, I chose $50,000 as a nice round number. 

4. What is your tax liability?

Take that income goal, and determine your tax liability for that amount of money, and add it to your expenses column. If you do not know your tax rate, you can look at last year’s tax return to determine it. If you don’t have that handy, play it safe and go with 20%. You can always change this number later.

5. Your Revenue Requirement

Take the grand total of your expenses from step 1 and add it to your desired take home income goal from step 3. This number effectively represents the total revenue your business needs to generate for the year, in order for you to hit your desired take-home income goal.

6. Your Daily CODB

Next, divide that total revenue number from step 5 by your number of billable work days from step 2 (240 days in my example), and now you are left with your daily CODB.

What do we do with our daily CODB? Well, we compare it against how often we currently shoot and against our current rates. Do you shoot enough, and charge enough, to make your desired income goal happen?

7. Analyze your CODB and set your rates.

In my example, my daily CODB is $317 per billable work day. That means that in order to hit my income goal, I need to shoot one house per day, 240 days per year, and charge at least $317 for that photoshoot. Or I need to shoot two houses per day for 240 billable days per year, and charge at least $158.50 for each shoot. Either way you slice it, I need to earn $317 per day for 240 days per year to make my desired take-home income of $50,000 happen.

How did you do?

Are you ahead of your goal? Great! What are you going to do with your profits at the end of the year? Are you behind your goal? Can you generate more business to book more shoots? Can you raise your rates to cover the gap? Some combination of the two?

My hope is that this simple exercise will get you thinking about about your business because that’s what it is. In my tutorial, I go through my budgeting worksheet line by line and explain the process in detail. I also provide a copy of the worksheet that has all of the formulas built in to make this a really simple process where you can just plug in your numbers.

I’d love to know how you manage your business budget and financials and if you have any helpful tips when it comes to setting your rates for profitability.

Are you budgeting in your business? How did you determine your rates? Do you have a healthy profit in your business above and beyond your personal income needs? Let's have a conversation about it and help others by sharing our collective wisdom.

Garey Gomez

5 comments on “Understanding Your Cost of Doing Business”

  1. Thanks for the detailed writeups!

    What if I follow every step and decide how much I want to make (#3 here). Everything goes well and I "succeed". In my opinion there is still a potentially huge error there. What if I could have made a lot more?

    The first thing photographers need to do is figure out how much they can charge. This is completely independent of costs! Think of this like an antique you picked up on an exotic trip with your parents as a youngster. Maybe you paid 15 cents for the antique. What on God's holy earth does that 15 cents matter?! If you focus on that number you are much more apt to undercharge! The thing is worth around 5 grand now. Get as much as you possibly can for it!

    The second thing they need to do as far as I am concerned is start expanding their skills so they can charge more in the future.

    I also notice beginning photographers tend to spend way too much money. Get in the market with the least amount of investment as possible (ie, don't go out and buy a D810 and a D810 as a backup). To me this is about 300 times more important than codb. Get in cheap! Those are going to be the lean times. Ensure that you make it through those lean years by being extremely frugal. Spend it up like a rockstar when you have jons coming out of your ears. Get in lean, charge as much as you possibly can. That number may take a good six months to figure out, but that is all part of the lean times.

  2. The above method mixing personal and business expenses together in a way that is damaging to understanding your business and your profits. Your business and personal should never, never be mixed. Your personal expenses have nothing to do with your rates. Yes, your business needs to make enough money to support you, however letting your personal expenses dictate your rates is an extremely dangerous practice. Your rates are determined by either the market and/or your skill level, not by the lifestyle you wish to live.

    Do separate household and business budgets. The only interaction is the owner disbursement from the business is a income on the household budget. If you need to increase business income so you can increase owner disbursements, determine how to increase the worth of your product or how to deliver more product.

    You don't increase your profit by raising your rates. In fact, when done wrong increasing your rates can decrease your profits.

  3. Thanks Gary. This is exactly a topic that would be excellent for a workshop at the PFRE conference.

    Some accounting software such as QuickBooks and AccountEdge have the ability to create and track budgets along side the actual numbers that one would normally input into an accounting program. Cheaper software doesn't often have the functionality which is why they aren't nearly as good. Another feature to look for is the ability to export selected data to a spreadsheet. Not just Excel, but in an interchange format such as Comma or Tab delimitated. This ability will let you set up "what-if" scenarios that you can save and run from time to time. It will also let you analyze the numbers in a non-standard time frame. You may want to create a separate report on the period between Thanksgiving and Superbowl (US) which is typically a slow time of year, to estimate how much money you need going into that period to survive and keep the bills paid.

    The easiest way to set up a Chart of Accounts, the categories in which you keep track of income and expenses, is to use the tax schedule for businesses (Schedule C in the US). Each line of the tax form becomes a header that one can put sub-headers under for one's own analysis. Example: "Gear Purchases" as the main header followed by "Camera/Lenses", "Lighting", "Cases", etc in as fine of detail that one feels is wanted. This way all that is needed at tax time is to print a year end report and transfer the numbers over almost verbatim. The same pattern can be follow for income if you are doing more than just RE photography to keep track of how each segment of business is doing. If you do weddings as well, you can track expenses that are uniquely for your wedding business and the income derived. Maybe weddings aren't holding their own and it's time to stop doing them or, perhaps, weddings are bringing in the lion's share of profit and they need to be a priority over RE.

    Since Gary brings it up, if you plan on selling your business, you may want to create some spreadsheets to do some "shadow" tracking for things like office rent if you are working from home and the expenses that go with having a commercial office such as insurance, more utilities, landline, etc. You also have to factor in a commute. The office may be close by, but over a month it could be a fair bit of money in gas or charging to run back and forth. This is handy if you plan to grow the business to include employees or plan to sell the business someday. Many cities won't allow you to have non-family employees working from a home office. That's not likely to be a problem if you have just one office person and another shooter that's outside your home most of the time but any more than that and that neighbor you don't get along with may call the city and complain forcing you to move the business right away and maybe even pay a fine. If you have kids, it's easy to call the office person a nanny/housekeeper.

  4. Thank you all for your comments! Great discussion here, and that's exactly what I was hoping for!

    I agree that personal finances and business finances need to be kept separate. This is an exercise - not a proper business budget - to get photographers thinking about their business profits, and their lifestyle, and actually understand the balance that needs to occur there. Setting an income goal is not part of a business budget, either. You might have a target based on past years' figures, but a budget that accounts for a goal to, say, increase profit by $25,000 this year, is just as much an act of imagination and dreaming. You back into real life business goals based on exercises like this one, and when you do that, you can determine what's realistic and what it might take to reach certain goals. It's a topic I have yet to see discussed, and I think it's a very valuable exercise to go through.... in addition to an actual business budget.

    I wonder, if we were to take a poll, what percentage of the readers here know their numbers inside and out. I have many friends who are photographers, and even more friends who are self-employed in other lines of work, and I can count on one hand the ones who are in tune with their profits and goals in a meaningful way. I didn't used to know my numbers...

    This exercise can be run a number of different ways. You can run it as a dreamer, and at the end you will come out with some basic understanding of how to make a dream happen. You can run it purely as a business budget and leave out all personal items, too. You'll get a different result. But your accounting software can automate a large portion of this anyway, because you should be doing that anyway. So I prefer to have the conversation about goals, and how to back into them to make sure they happen, because that's what hits home for me.

    It's a numbers conversation, and for many, that's not an easy conversation to have. And if there are many among us who are, for lack of a better term, "creative-types", if you follow stereotypes, this is a topic one might prefer to ignore because it's difficult to understand. That's not a healthy way to run a business. One of the goals with this, is to hopefully make that a little easier for folks who need it.

    And yes, there are trivial expenses as Andrew points out. This is a "big picture", "5 years from now" sort of an exercise. What's the alternative? Just don't do the exercise at all? Where will that get you?

  5. I often use your advice and notice that it really helps. Thank you for what you are doing. I want more content. Because it is very useful.

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