Tax season is upon us, a perfect time to talk about profit. For those of us sole proprietors filing a Schedule C, “Profit or Loss From Business,” the magic number is found on line 31, “Net profit or (loss).” So what, exactly, does this number represent?
On the one hand, net profit is the result of simple arithmetic: you take all the money you earned from your business, otherwise known as gross income, and you subtract all of your business-related expenses. Take what you earn, subtract what you spend, and the result is your profit.
On the other hand, profit is the fuel that powers your business and makes it grow. Without profit, your business grinds to a halt. In fact, unless you show a profit in at least three of five consecutive years, the IRS may decide that your business is really a hobby.
In this case, you are not allowed to take deductions to offset your income (see the section “Not-for Profit Activities” in IRS Publication 535 for more information on the so-called hobby rule). So an expense that might be a perfectly legitimate deduction for a profitable photographer or videographer, such as equipment purchase or travel, might be disallowed for someone whose expenses consistently outweigh their gross income.
Let’s look more closely at gross income. Where does it come from? Most of our income as professional image makers comes from what we bill our clients. If we have royalties from stock photography or books, that is included too. Wages we are paid as employees are not part of our business income. When clients send you a 1099 form, that is for business income; wages from employers are reported on the W-2 form.
The standard method of billing clients in our profession is the fee-plus-expenses method. In other words, you charge a fee for your creative services (also known as a day rate), and you also bill your client for any job-related expenses — those that show up as line items on your invoice. Thus, your gross annual income would consist of the total of all paid invoices for a given year, plus any other business income.
So the real question becomes this: how many jobs can you expect to bill during the year, and how much is each job worth? If you figure a working year as 50 weeks — you are going to take a two-week vacation, aren’t you? — and a working week as five days, then there are 250 working days per year. I have yet to meet a professional image maker who bills all 250 days. (If you are out there, please get in touch, and I will interview you for my next Eye on Image-Making column.)
In fact, you may find that for every billable day of shooting, there are several days that may not be billable — days spent planning the shoot, contacting the subjects, gathering equipment, editing the take, and sending the images to the client. It would be nice if clients would routinely pay for this work, or that creative fees would be hefty enough to cover the time spent on these necessary tasks — but this is often not the case, especially on lower-budget projects.
OK, let’s do some math. You have 100 billable days, and your average invoice is $1,000. So your gross income for the year is $100,000. You feel great! Now, what about your expenses?
In business, there are two kinds of expenses: fixed costs and costs of the sale. Fixed costs are the costs that your business incurs day in and day out, whether you are shooting 100 days per year or no days at all. These costs are listed on Schedule C under “Expenses.” They include advertising, car and truck expenses, depreciation, insurance, interest, legal and professional services, office expense, rent or lease, repairs and maintenance, supplies, travel/meals/entertainment, utilities, and wages. Costs of the sale are those costs you incur as a direct result of the particular shooting assignment—for example, travel to and from the shoot, meals, wages paid to your assistants, expendables, etc.
Now for the bad news: although clients routinely pay for costs of the sale, most of your fixed costs cannot be billed to your clients as line-item expenses. Let me rephrase that: in my experience, clients balk when you try to charge them for a share of your fixed costs.
When I worked as a professional photographer in San Francisco, I carried a business-insurance policy designed to protect me and my clients in the event of a mishap during the shoot (think light stand crashing into antique Ming vase). It was like pulling teeth to get some clients to accept a $25 per day charge to help pay for this insurance, which is a fixed cost.
The same thing was true for a $10 per day charge for messengers — frequently a necessity in a traffic-clogged metropolis, especially in the days of running film to the lab. If clients won’t help pay for these costs, how are you going to get them to pay a share of your rent, utilities, office equipment, etc.?
So Who Pays?
Well, if clients aren’t going to help pay your fixed costs, who pays? You guessed it — you do. The fixed costs usually come out of your creative fee. In other words, if your average invoice is $1,000, perhaps your fee is $750 and the billable expenses are $250. The $250 is essentially a wash — the client is merely paying you back for money you have spent on this particular shoot. This is true even if you mark up your expenses, as most professionals do. Your mark-up represents the fact that you buy at wholesale and sell at retail, as do all businesses. Mark-ups are not profit. They merely help defray some (hopefully most) of your costs of providing things needed for the shoot.
So, at the end of the year — assuming 100 billable days and deducting the $25,000 in billable expenses — you now have $75,000 left, out of which must come your annual fixed costs. Exactly how much is that? Well, let’s say you have $2,000 per month in fixed costs, or $24,000 per year. So your net profit stands at $51,000. OK, that still doesn’t sound too bad. But wait, there’s more … You are going to pay taxes, aren’t you? They’ll take a bite out of your profit. If photography is your sole source of income, that doesn’t leave much for annual living expenses, health insurance, retirement, college fund for the kids, vacations.
Sounds depressing, doesn’t it? But the good news it this: Wouldn’t you rather know all this before starting your business and investing so much time, energy, and money? Wouldn’t it be helpful to figure out how much you actually need to live on for a year, and then figure out how many jobs you need and what your creative fee should be?
Most successful businesses have a written financial plan, which is part of a larger business plan (a topic for another column). Many creative professionals, on the other hand, simply hang out their shingle and wait to see what happens. Unfortunately, many new businesses often fail, in part because they neglect the concepts of profit and profitability.
Where to Get Help
If you want to tilt the scales in your favor, I can recommend two excellent books for further reading. Nolo Press publishes “How to Write a Business Plan” by Mike McKeever. I have used this book in my classes on business planning for photographers, and it should be part of any professional’s library. Allworth Press publishes Tom Zimberoff’s “Focus on Profit,” which is specifically designed to help photographers start and operate successful businesses.
Good luck with your business!
[tags]photography business, photography advice[/tags]