Jan. 21, 2022

What is so important about the cost of doing business?

What is so important about the cost of doing business?

"If you know your costs, you have key information that's going to fund many of your decisions going forward; you can build confidence in your pricing, you have more strength in your negotiations, you have more justification, to walk away from clients that don't match your business goals, you will know what your business can afford and what it can't, you'll make smarter investments at the more appropriate time."

EP 56:  Why is knowing your cost of doing business so crucial?  What insight does it actually give you?  In this episode, I'll discuss the role CODB plays in your budget and your pricing decisions.   


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Michael Der  0:04  
You are listening to Artrepreneurs, a podcast that inspires photographers and visual artists to live their best creative lives. My name is Michael der I am your host and a full time photographer here to give you some tools so you can build your life and creative self employment. Beyond that I get to sit down with an amazing community of creative professionals to talk about process, business, and the lessons that have helped them grow. So let's get to it. Artrepreneurs Season Two kicking off next.

What is up everybody? Welcome back to the show. We are on episode 56 of Artrepreneurs were in season two, thank you so much for tuning in. Now I know I talk a lot about finances and money on this show maybe a little bit too much. But believe it or not, is not in an effort to make you more miserable than you already are. Sometimes people get very annoyed or irritated with the fact that money conversations come up. Now I actually think money conversations, particularly in creative businesses are very empowering. And the reason why is because most industry professionals refuse to talk about it. And I remember specifically being in a photography workshop once and during the entire week that I was there, the only time that money was ever brought up was when one of the instructors mentioned that his pricing was based on CODB, which we call cost of doing business. Now when someone asked him what that meant, because I certainly didn't know what that meant, either. So I was glad that somebody brought it up, they pressed him and said, What does it mean? And he said, just look it up online, you can find a cost of doing business calculator somewhere on the internet. And so that was it. That was the only time money ever came up. And we barely skirted by it. So I know that we can have a 90 minute conversation on this. And I'm going to try to do this in 10. But the conversation needs to be had because if you understand your costs, at its core, you can better strategize how you conduct your business. 

Now, typically, when starting a photography business, my feeling is that these things are never considered. And I feel this way, because when I got started, and I began meeting a ton of colleagues, none of us did it. We didn't know if anything was going to stick, we certainly didn't have any overhead. So in our heads, our small little brains, having this business plan of what cost could potentially be seemed a little bit over the top. And if you consider how easy it is to get started in a freelancing business, it actually makes total sense that that level of behavior, right that mentality, you don't have to go to the bank, you don't have to apply for a startup loan, you don't have to prove to anybody, Hey, these are the projected expenses for the first 12 months here are the projected earnings, you don't have to have any of that jotted out. But as I sit here, thinking about this, maybe just maybe we should be taking a page out of that book, you know, maybe we should know what our costs are. Maybe knowing these costs will give us a roadmap for what our goal should be. Maybe it will help us make more educated decisions on what jobs to take, what job to avoid, and how we should position ourselves. So let's do a little bit of an exercise here. Let's do a full audit of our photography expenses. Okay. 

Now, if you've never done a full audit of what your costs are, I recommend doing it for no other reason than your own financial edification of what it truly takes to run and invest into your business. And you may be thinking, well, there's not a whole lot of overhead, so it can't be a whole lot. But in my opinion, this narrative is really what tricks us into thinking we're doing better than we are. So for this, I'm going to give you a list of things to write down pulled straight from a CEO DB calculator on the NPPA website. Professional expenses can include the following rent for office or studio space, equipment and accessories, computers, hardware and software, web hosting and Portal services, office supplies, professional development, like portfolio reviews, or business consultations, subscriptions and dues like Adobe Creative Cloud or QuickBooks self employed health insurance taxes, business licenses, utilities, phone, internet, equipment, services and repairs, vehicle expenses, advertising and promotion, equipment and liability insurance, legal and accounting services, postage, and shipping and payroll. 

Who Okay, so that is a big list. And you might even dozed off while I was reading that. Now, while some of those costs may not apply to you, right, like if you're starting out, you may not have payroll, you may have legal fees or advertising, but you aren't going to engage with the majority of these expenses from the jump. And the longer you stick with this business, you might hit all of them, and then some. So I'm going to link this cod calculator in the show notes for you. So you can do this on your own time. You can do this as you follow along. But your assignment is basically to write down your expected annual expenses next to each category. And you might notice as you're going through that list that some of the categories are really easy to fill out, and others are not, you know, phone bills, web hosting, rent, liability insurance, those are very consistent. And we call those fixed expenses, because they're going to show up each month like clockwork, so you should really have no problem finding those numbers. But there's a lot of variable costs in this list as well, which is going to admittedly make it a little bit tougher to estimate. You know, you don't know what your vehicle expenses are going to be each year because you don't know how much you're going to drive and what issues might arise with the car. Same thing with repairs or upgrades or education or business meals or advertising. So just do the best you can it doesn't have to be exact. 

Now if you don't use the website that I'm going to be providing that's okay, you can do this by hand, simply add up all the expenses that you have and then divide that number by 12. That's going to give you your monthly average cost. So let's think of an example here. If you calculate that your annual cost About About $30,000, if you divide that number by 12, that's about $2,500 a month that you're going to need to make just to break even. Now, if you do use the NPPA website calculator, it's going to be really cool, you get some additional information to help you with your pricing, you can enter in your desired salary, your number of billable days, so you can get an overhead cost of what each assignment rate should actually be priced at. But like I said, if you're just doing this manually, and you calculate your monthly costs, and that's all you do, and at the very least, you now have a barometer for what you need to make in return. 

And if you're just starting out, like you just graduated school and you're starting to freelance for the first time, you may have no barometer for your monthly and annual costs, which is understandable. You know, you might spend more on education and startup cost right out of the gate. Or you could spend nothing on gear early and go absolutely ham on upgrades in year three. So I get it, it's probably going to be a little intimidating to pigeonhole yourself right now. So what I recommend for those of you who have no clue what to put down, just simply ask a parent, a colleague, a professor, anyone that can give you some guidance or mentorship as you fill out this list. And if you're living at home with mom or dad, and they're taking care of the housing, they're taking care of the food, the internet bills, here's what I would suggest, do two lists. Okay, do one for your current costs. So if all you're paying for is your phone, Bill and gas, write those down, and then do one for the expected costs. If you were to move out and become financially autonomous, so get an average idea of what the rent is going to be in your area. You know, ask your folks, what does internet cost? What are utilities run you, I think that's really important. I have no issues with young people living at home. But I really want you to be aware of what the costs are going to be when you move out. So don't get blindsided by what things ultimately cost. If you're prepared for the cost of living and the cost of business, you can make very strategic choices. 

Alright, so let's revisit that example I mentioned a second ago, you've got a $30,000 cost of business, let's say you cannot make $30,000 a year, and just break even and feel okay about that. Alright, I'm not trying to be a jerk. I'm proud of you for making money freelancing. But that's just not enough. That is a failing business. You've afforded yourself no room for error, one cancelled gig and you're in the red, you're leaving yourself no money left over to reinvest back into your business. That's the whole point of profit. And beyond that you have no money left to invest for retirement or personal experiences, like your vacations, weddings, home, etc. So breaking even is a bad business. So with that being said, what do we do? Well, we have options. 

Now because we have information, first thing we can do is we can add another job to the mix. Okay, so we can either add a part time job to supplement the freelancing income that we're already making. Or we can get a full time job and then freelance on the side to supplement that, the next thing we can do is diversify our client base and hopefully increase our chances of getting higher paying jobs and prevent loss when one client goes down. Now, if you don't want to add any more additional responsibilities to your plate, because you're already exhausted enough, the next thing I would suggest doing is raising your prices. Now it doesn't really matter what you choose by knowing what your expenses are, you can adjust accordingly. So you have options now. 

And this is exactly what I did. I did this basic math very early in my career, I kind of just tallied up how much it was going to cost me to live my life at the time I was single, I really didn't know anything about the business of photography, but I figured out that it was going to cost me $30,000 to live my life. All right. And I was told that the going rates for shooting sports games was around maybe $150 A few years ago, okay, so not very much. And I did the simple math, I said, Well, how much would I have to shoot in order to hit $30,000. And the math was very simple was 200 games 200 games to just breakeven. Okay? Now what I didn't know, at that time, were all the little hidden costs, not so hidden, but hidden costs. Okay, so there are taxes on that $30,000, because I'm not employed, I'm contracted. So that's about $21,000, that I'd really be taking home after taxes. And on top of that, sports photography requires expensive glass and multiple workhorse cameras, while putting them in probably the most amount of danger. So it's not like you're going to get tackled by a linebacker in doing engagement photography, but you could at a football game. And if you're shooting 200 games a year, you're probably busting a shutter or two and having them replaced, at the very least. And on top of that you're talking about the gas and the additional hours of travel, it's chipping away at your net income. So I realized very early that in order to shoot games at that assignment rate, I would either have to diversify substantially, or cut the time sucks out entirely, or increase my prices on jobs that I actually had control over. And what I did was all three of them. Alright, so I went a different route that yielded higher rates, I increased my prices, and I cut up small jobs that took up too much of my time. And then as I got further in my business, as I put years under my belt, I got aggressive on cutting costs. And so it didn't really matter to me if I made a lot of money during the year or if I made a very humble amount of money. I just wanted to become more critical of my impulse upgrades. So I could still maintain profit in my business because I knew I was going to need to rely on that for a number of different things. I didn't want to be equipment rich and cash poor is basically what it came out to. You know, I knew I needed an emergency reserve just in case I lost clientele because I had that experience before. I knew I wanted to invest in marketing, not just gear and I knew I wanted to fund projects that maybe others would be unwilling to spend on their own. 

And so in order to do any of this really the bottom line is in order to make any of these decisions I needed to confront the reality of my situations in the first place. You know, I am at worst making education hated assessments for my business, not blind once. And I think another way of putting this is to not worry just about the gross income. Alright, so people get very jazzed up about the gross numbers. Oh, I made 70 grand I, oh, I made my first six figure year. Well, those are great. But you also have to think about the net income. Alright, so if I made $100,000 a year as an example, and you made $50,000, okay, that's half of what I made. But if I live off 90,000, and you live off 30, then technically, you have a higher net worth than I do, presuming we don't have any assets. 

And I remember and this is actually a true story. I came off a year feeling pretty good about myself, okay, because I was like, oh, man, I can support myself freelancing full time. And my dad who's a CPA, showed me how to really look at my tax return, which is good to tell you the whole truth, right? And it's the whole truth and nothing but the truth, you know, you can tell yourself that you're doing well, but your tax return is going to tell you what's really going on. And he showed me my profit. And it was so low, and I'll never forget his words. He said, Mike, this is this is poverty level income, you'd be better off working at McDonald's. And so what I thought was good, was in fact, not so good. And maybe you're in a similar position, or maybe not at all, maybe you're killing the game, I really hope you are. But I don't want you to be discouraged, I really don't. I just want you to know your situation. Okay, so if you know your costs, you have key information that's going to fund many of your decisions going forward, you can build confidence in your pricing, you have more strength in your negotiations, you have more justification, to walk away from clients that don't match your business goals, you will know what your business can afford and what it can't, you'll make smarter investments at the more appropriate time. And it all starts with a baseline. So it's not the end all be all computation here is just giving you insight into your business. And the more insight that you have, the more you can strategize its growth. So as a reminder, I am going to be posting the NPPA link in the show notes. So if you do want to get a closer look at your cost of doing business and get an idea of what your pricing should be based off of the cost of your business, then definitely take a look at this. I think it's a really good resource to have.

So that is my time for today. Folks, thank you so much for joining me. Please have a fantastic rest of your day a fantastic rest of your week. And I will see you on the next episode. 

What's up Artrepreneurs thank you for tuning in and making it all the way to the end of the episode. If you enjoy the content you just listened to hit subscribe and tune in again next week. Also follow us on Instagram and Facebook at Artrepreneurspod for updates, promos and giveaway contests that we run throughout the year. And if you haven't already, be sure to check out our really cool website  Artrepreneurspod.com It's a great resource for you to download informational PDFs and booklets access discount code from our amazing affiliates and read what our audience is up to on our community blog. For now I just want to say thank you for tuning in supporting the show and being a part of this journey. This is Michael der signing off for now Artrepreneurs Season Two let's go

Transcribed by https://otter.ai