Your Dream Studio: Understanding and Controlling Overhead Expenses with Jeff & Lori Poole
Building Your Dream Studio
In last month’s Business Corner, we started making an annual plan for your studio so that you know how much your studio has to make for you to make your desired salary.
A well-run home-based studio keeps approximately 45% of every dollar it makes. Your net profit should be 45% of your gross sales. This means that for a take-home pay of $75,000, your studio should be grossing at least $167,000:
To learn more on how to work these numbers and turn them into a plan of X shoots at Y dollars each, see last month’s article (August 2018, “Your Dream Studio: Creating an Annual Plan”).
Only 45%? But it doesn’t really cost me anything to shoot and burn.
A common mistake that many new photographers make is assuming they keep every dollar they make. Businesses cost money. Whether you only offer digital files or you are a full-service studio, there are still costs involved. Cameras, lenses, memory cards, computers, hard drives, ink, paper, pens, internet, electricity, gas in your car—it adds up. If you’re serious about making money in this business, it’s important to treat it as a business. That means recognizing your expenses and learning to budget for them.
Every photographer should open a business checking account. Deposit all your sales into that account and deduct your expenses from that account. Do not buy personal items from your business account and do not buy business items from your personal account. Once you keep your finances separate, you’ll begin to see your sales and expenses much more clearly.
Where does the rest of my money go?
As you start tracking the dollars you spend, they should fall into one of two categories: general expenses (commonly referred to as “overhead”) and cost of sale.
Cost of sale refers to money that you spend in serving a client. It includes the cost of goods (the thing you’re selling, be it a canvas print or a USB drive). It also includes costs for shipping, packaging, mileage and meals on the job. Other costs are contract labor paid per job, such as a second shooter, retoucher or album designer. Stay tuned for next month’s issue when we explore cost of sale in depth.
General expenses, or overhead, is money that you spend that is not tied to a client or sale. General expenses can be broken down into these subtypes:
- Building overhead: rent/mortgage, utilities, insurance
- Administrative: dues, subscriptions, education/convention registration, office supplies, software, mileage, props, bank fees
- Marketing expenses: studio samples, paid advertising, wedding or other trade shows
- Employee expenses: hourly employees or office assistants
- Depreciation: camera gear, lighting, furniture, computers and other major purchases
Set up your accounting software or checkbook register (for your business checking) so that you categorize every expense as either General Expenses or Cost of Sale. Bonus points if you further subcategorize your General Expenses as listed above. You should not need to get much more granular unless you are aligning your subcategories with deduction types on your tax return.
Cost of sale should be no more than 25% of your gross sales. General expenses should be no more than 30% for a home-based studio or 40% for a retail studio. This should leave you with at least 45% net profit (home) or 35% net profit (retail).
I spend too much on general expenses. What do I do?
It’s not uncommon for photographers to realize they are overspending the first time they analyze their books in this way. Even if your accounting results aren’t optimal, it’s still a great bit of knowledge for you to have. Once you know there’s a problem, you can take steps to fix it.
Our first year in business as Indigosilver studio, Jeff and I spent 68% of our gross sales on general expenses. We spent 38% on cost of sale. Now, if you’re paying attention, you’ll realize that 68% plus 38% adds up to more than 100%, which means we spent more money than we made. We closed out 2010 at a loss, despite making nearly $90,000 in gross sales. It was incredibly discouraging to be going deeper into debt instead of living our dream.
We were able to reverse the trend by learning basic managerial accounting. Once we knew we were overspending, we could focus on cutting costs. If your cost of sale is too high, it usually means you don’t have enough markup on your products.
Where can you trim the fat?
Take a hard look at your general expenses and evaluate where you might be overspending. This is often a tough analysis that requires looking at some difficult truths. Here are some common areas where photographers overspend.
Are you living outside your means? Do you really need the location you’re in? Jeff and I realized that a studio in the heart of downtown was not the best financial decision. We moved our studio to the suburbs and immediately added $800 a month to our bottom line.
Photographers love conventions. Jeff and I love conventions. We speak at them, and love seeing our photographer friends from all over the country. We believe in the value of in-person learning. But if money is tight, we may be more selective in which conventions we attend. We learned to scale back on buying every e-course, webinar, action and preset we came across. Some courses you buy on impulse, telling yourself you’ll watch them in your downtime, only to find them buried on your hard drive three years later.
Watch your prop spending.
Newborn and children photographers collect hats, wraps, fabrics, chairs and more. If you’re getting Amazon deliveries on the daily, it might be time to scale back. If you’re bored with your current selection, befriend your local competitors and offer to prop-swap instead of buying new.
Cutting marketing expenses can be a double-edged sword. You don’t want to reduce your exposure so much that you lose sales. Get creative with your marketing. Attend networking events and pass out your business card. Learn to give your elevator pitch to everyone you meet. Collaborate with other vendors in your area.
We know. You’re so swamped. You couldn’t imagine not having Karen answer your phone or package prints while you edit your images. But if you have a jack-of-all-trades assistant, she is probably not operating at maximum efficiency. Studies have proven over and over that multitasking is extremely inefficient. Karen simply can’t get a lot done if she has to stop whatever she’s doing to answer the phone, and then stop to send that email you just thought of, and then stop to do that other task you just realized has to be done right now. That means you’re bleeding money on an assistant that’s hard to tie directly to improved sales.
Instead, work on your own efficiency with systems. Systematize each task in your business until you do it the same way, quickly, predictably, every time. Use the Pomodoro Technique for better productivity. Better yet, start outsourcing. Delegate routine tasks like editing to someone you can pay per job instead of a catchall hourly employee. You’ll save time and money. For an in-depth discussion on efficiency and outsourcing, watch the bonus video that accompanies this article.
Do you have gear acquisition syndrome? Do you buy that new camera body, lens or flash every time it’s updated? “But it has this new feature than gives me sync speeds of one bajillionth of a second.” Gear purchases should be evaluated like every other business decision: Does it make you more money? Is there a return on investment? Or are you just a gear junkie indulging in retail therapy? Most likely, you can squeeze another year or two out of your gear before it’s truly deprecated. New gear is fun, but it’s an expense that can easily be trimmed.
A penny saved is a penny earned.
By now, you can see that saving pennies and cutting costs diminishes your expenses, which in turns increases your net profits. Lots of small cuts throughout your budget can add up to big savings.
As for me and Jeff? 2010 was a loss. In 2011, we made a tiny profit, but not enough. In early 2012, we invested in learning business. That’s when we moved our studio to a more affordable location, and our journey to financial balance began. Within a year, we increased our net profit to 29% (almost to the 35% benchmark for retail studios). We kept trimming costs and working our numbers, inching that profit higher.
For the past two years, Jeff and I have brought home net profits of over 50%—well beyond the benchmark. It feels so good to see that progress. It takes hard work and commitment, but no one said running your dream business was easy. Are you in?