|Cost Analysis: Am I Really Making Money?|
|© 2003 by Jack Wolcott|
"We're doing great! We're making $1200 a wedding," Linda and Bob said.
"Is this really 'doing great,'" I wondered? "What are your costs?" I asked.
"Just fifteen or twenty dollars for tape," Linda said, "and a little for gas."
"I think you're missing something," I said. "Since you've asked for my help with your business plans, lets do a thorough cost analysis to determine how well you're really doing when you're charging $1200."
Cost analysis is at the heart of good business practice. Until costs have been established it is impossible to determine how well your business is doing, and much to charge for services.
There are six questions to be answered:
Calculating Equipment Costs: An Example
For this example lets assume that Linda and Bill plan on shooting 20 8-hour weddings and 10 4-hour events, for a total of 200 hours of shooting annually.
They have decided to buy a new Sony DSR PD-150, at a cost of $3,500 and want it to pay for itself in two years. How much will they have to charge for shooting to do this?
The basic economic premise here is that the job of money is to earn more money. Money earns through acquiring interest, over time. To illustrate how this works lets assume you have $3,500 in the bank, earning annual interest of 2%.
Over two years, here's what the $3500 would earn:
|Year||Capital||Earned (2%)||Annual Total
During these two years the money has earned $141.40, and your $3,500 has grown to $3,641.40
In order to purchase their camera, Linda and Bill must "borrow" the $3,500 for two years - that is, they must take it out of an income producing instrument -- their savings account, a Certificate of Deposit, etc. -- and use it to purchase equipment. To make the purchase an investment the camera must return the capitol and also earn as much as the money would have if it had been left in the bank.
So in order to pay for itself in two years Linda and Bill's camera must earn $1,820.70 annually ($3,641.40 / 2) or they are losing money. That's $9.10 per hour of shooting if they are shooting 200 hours a year -- ($1820.70 / 200 hours) -- to cover the actual cost of owning the PD-150.
Calculating the Cost of Doing Business
In addition to figuring the cost of equipment, there are operating costs that have to be calculated in order to determine how expensive it is to offer your video services. For purposes of calculating these costs, lets assume that Linda and Bill work a 48 hour week, 50 weeks a year. So they have 2400 hours in which to earn the money necessary to pay for all their expenses. Keep this figure in mind, for it is the basis for calculating all the hourly operating costs of the business.
Lets say that their equipment insurance costs $900 per year. This includes protection for them and their equipment both at home and in the field and covers their equipment 24 hours a day, 52 weeks a year. However, they have only 2400 working hour in which to earn this money. Their $900 annual premium costs $0.38 per hour (900 / 2,400.) Their E&O insurance costs $90 per year. Calculated the same way, it costs $0.04 per hour. Total insurance cost: $0.42 per hour.
Linda and Bill's transportation cost includes the amortization of their car, plus gas, lube and repairs, car wash and automotive insurance.
The car cost $25,000 and they amortize it over five years. Cost per year is $5,000, but they only use it 40% of the time for business, so the business cost is $2,000 per year.
They have 50 48-hour weeks - 2400 hours -- in which to pay for this.
Hourly cost is $0.83
They travel an average of 6,000 business miles per year. The car gets 20 miles to the gallon. The annual gas cost = $435.00 (gas at $1.45/gallon x 300 gallons). With 2400 hours in which to pay for this, the hourly gas cost is ($435.00 / 2400) = $0.18
Bill gets a $35 oil change every 3000 miles, $70.00 for the 6,000 business miles. Based on 2400 business hours per year, the hourly cost is $0.03.
Linda and Bill's repair costs are $365 per year -- $0.15 per hour.
They wash their car monthly, at a cost of $8.00 per wash, $96 per year. Hourly cost is ($96 / 2400 hours) = $0.04.
Their automobile insurance costs $1500 per year. Only 40% of this is for business use -- $600. ($600 / 2400 hours) = $0.25 per hour.
The total hourly cost of transportation is $1.69
Next comes facilities costs: utilities, mortgage, phone, security, repairs. For this example, assume their business occupies 15% of a 2300 sq. ft. home: that's 345 sq. ft. -- two 12' x 12' rooms and a large closet. Linda and Bill can deduct 15% of most of the costs associated with your home. The table below represents the actual cost of utilities for a 2300 square foot home. The mortgage is fictitious, just for illustration.
|Advertising||$1200 ($100 per month)|
|Supplies||$ 600 ($ 50 per month)|
|Total||$3250 ($3250 / 2400) = $1.35 per hour|
So the total hourly Cost of Doing Business, based on a 48 hour work week, 50 weeks a year looks like this:
|Total||$4.22 per hour|
|.||$33.76 per 8 hour day|
|.||$202.56 per 48 hour week|
|.||$10,128.00 per 50 week year|
Keep in mind that Linda and Bill's Cost of Doing Business is $4.22 per hour, 8 hours a day, 6 days a week, 50 weeks a year, irrespective of whether or not they working.
What it costs to shoot a wedding
With this breakdown of operating costs - the overhead -- in hand, lets consider the basic cost to Linda and Bill of shooting a one camera wedding or event.
These are the assumptions with which this example has been developed.
Lets assume they have $7,000 in the bank, at 2% interest. Over five years it will earn $728.57, as we see in the table below.
|Linda and Bill's $7.000 has grown to $7728.57 Remember, to make the purchase of equipment a wise investment, it must return at least as much as they would have made if they left the money in the bank. So every year for each of five years the equipment must earn $1,545.71 - ($1545.71 x 5 = $7728.55) -- or they are losing money. That's $7.75 per hour of shooting if they are shooting 200 hours a year ($1,545.71 / 200 hours) to cover the actual cost of owning their equipment.
To the $7.75 hourly equipment cost must be added a miniDV tape cost of $5.80 and the $4.22 cost of doing business (CODB), bringing the total hourly cost of shooting to $17.72
But this is only a sub total, for we must add two additional and very important items: a salary for the videographer, even it it's Linda or Bill doing the shooting, and a salary, or profit, for the business. Lets call the hourly salary $25 and the profit 40%.
This gives us:
|Equipment, tape, CODB||$17.77|
|Sub Total:||$42.77 per hour|
|Total Cost||$59.88 per hour|
Some might argue that a 40% profit is unreasonable or even unnecessary. Gary Fails, a theatrical lighting designer, addresses this objection succinctly in the March 2003 issue of Entertainment Design (p.7). He argues that ". . . profit is the 'well' from which all good things in a business come," pointing out that "an industry with relatively lower profitability would have relatively lower wages, benefits, product innovation, and a relatively lower ability to attract capital for growth." In other words, without profit, you're not in business. Build profit into your thinking!
Having calculated the hourly cost of shooting a one camera wedding, we must reckon the costs associated with editing the wedding in the same manner.
Premise: The actual cost of your editing system is:
|Proc Amp/TBC||$ 600|
Lets assume that Linda and Bill have $5,800 in the bank, at 2% interest. Over five years it will earn $603.67, making a five year total of $6,403.67
So every year for each of these five years the editing equipment must earn $1280.73 (6,403.67 / 5), or they're losing money. ($1280.73 / 650) = $1.97 per hour of editing to cover the actual cost of owning their editing gear. Allow for repair costs of $365 per year, for an hourly cost of $0.56 The CODB is still $4.22 per hour, and lets provide an editor's salary of $25 per hour and a profit for the business of 40%. The hourly editing cost, based on 650 hours of editing per year, looks like this:
|Total Cost||$44.45 per hour|
So in this example, Linda and Bill's actual cost of producing an 8 hour wedding, with 20 hours of editing, with a salary of $25 per hour for the videographer and the editor, and a 40% profit for the business, is:
|Total shooting costs :||$59.88 x 8 hours = $479.04|
|Total editing costs :||$44.45 x 20 hours =$ 889.00|
If the couple is charging $1,400 for a wedding they are paying all their expenses, paying themselves $25.00 per hour for all their shooting and editing time, and making a profit of 40% for the business. At the $1200 they're currently charging, Linda and Bob are losing $168.00 per wedding.
Given the premises upon which these examples have been calculated, there are only two ways to revise these cost figures downward. The couple can either lower their hourly salary or they can lower the profit margin for the company. The other costs are fixed and probably can't be changed significantly. A better strategy, of course, would be to raise their prices!
Finally, in order to make this analysis as straightforward as possible I have left out considerations of State and Federal tax liability and credits, which must be included on a case by case basis. Also, there may be costs unique to individual businesses which I have overlooked. Factor these into your individual analysis using the methods I have illustrated.