Understanding Your Cost of Doing Business: Part 2 of 2
In Part 1 of this two-part blog post series, 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. In this blog post, 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.