Understanding Your Cost of Doing Business: Part 1 of 2
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 loveto 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 two-part 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:
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:
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.
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.
How do you calculate your rates then? It’s not as hard as you might think. In Part 2 of this blog post series, I’ll cover my budgeting formula from my tutorial series, Mastering Real Estate Photography in detail, so you can follow along and take a stab at your budget.
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.