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Sunday, December 22, 2013

Make A Profit Or Quit Freelancing

I recently came across this great blog posting by Vincent Laforet from a few months ago that does a pretty good job of explaining how to come up with what you should charge. Although the part about your "tax bracket" is a little misleading, everything else is pretty much spot on. The bottom line is to know what you should be charging per day in order to make a profit. He explains in detail below.

There are four letters out there (an acronym to be exact) that have the potential to literally shape your future as a creative, and to determine whether or not you will be able to stay in business long term.   
As simple as this formula is, and as basic as it will appear to you once I explain it, I am constantly surprised (shocked to be honest!) at how few people pay attention to this simple number.   Even veteran freelancers don’t seem to know what their daily C.O.D.B. number is.    
C.O.D.B stands for "Cost of Doing Business." Basically it’s a number that represents what it costs you to operate your business for every day that you work. 
On a basic level, you add up all of your purchases and expenses to run your business, as well as your salary (I suggest you add your salary, but some people don’t)  and divide that by the total number of days you expect to work each year.    That will give you a number that is the MINIMUM you must make each day to BREAK EVEN.    If you make more per day on average than your C.O.D.B., you are profitable.   If you match your C.O.D.B but work fewer days than what you're expected, your business is in the red, and your on a path to being out of business…
What has amazed me time after time is how few of my colleagues know what their number is, and how that in turn makes it very difficult for them to grow their business over time – let alone what to charge their clients.
You should know this number by heart as it should help you determine the minimum rates you need to charge your clients on a job per WORKING day, to stay solvent as a business.   Keep in mind that if you get paid per SHOOT day – and don’t get paid for treatments, conference calls, research, prep and post – you need to cover ALL of those days in your SHOOT DAY FEE of course.    In other words, if you get paid 3 shooting day rates, but you actually worked a total of 12 days between pitch, prep, shoot, and post – you need to QUADRUPLE your DAY RATE (or daily C.O.D.B. day rate) to break even for those 3 shooting days you are actually being paid for.
So here’s how you calculate it:
You can start on a spreadsheet or with a simple piece of paper, or here’s a link to an Excel Spreadsheet I’m putting up for you to fill out on your own with your own expenses, categories, and desired salary.
Start by listing all of your business expenses per year, your cell phone service, the gear that you buy, the repairs, the insurance, etc.  Think about EVERYTHING you buy for your business on a yearly basis.   And if you buy a camera for example, divide that by the number of years you expect to have it in service, the same goes for a computer, and add that final number to your spreadsheet.
Then don’t forget to add the salary you pay yourself – this is critical.   The salary is something that should be able to cover your rent, clothing, utilities, etc.   Oh and don’t forget about taxes on that salary you’re giving yourself.    If you need $3,000 to live on a month, remember that that’s AFTER taxes.   Depending on your tax bracket you should add the correct tax percentage on top of that to determine the salary you need to pay yourself each month BEFORE taxes.  
Once you get a little more advanced, I suggest you put some additional categories in there:  such as retirement money, and savings.   We’re leaving that out for now – but you shouldn’t!   Oh:  and while freelancers don’t generally pay themselves when they take vacation time… consider taking that into account at some point too…
This might be getting a bit complicated for some – so below is a visual breakdown that I put together.   I added a bunch of categories on there, many of which you may not have/use in your own business, but I wanted to err on the side of adding too much so that you can see how quickly things can add up.   I also picked a "standard" salary and expenses (there is no such thing) for someone working in a mid to large city in the U.S.
To some of you these will be exorbitant numbers, to others this will be very low.   It’s all relative.   Frankly I made quite a few up.  As long as you get the principle we’re good.   $70K is a darn nice salary in many parts of the United States and definitely the world.   If you live in New York City on the other hand… it’s difficult to live on such a salary for many due to the high costs of living and exorbitant real estate.  If you have a family with children  $70K is difficult in many parts of the U.S.   It seemed like a good salary goal to use here for those reasons.
The numbers below assume you work 200 days per year.  The average full-time person works 260 days not counting vacation/holidays (5 days a week times 52 weeks.)   But very few freelancers work back to back 5 days a week – 200 is more realistic.    That’s what the "daily total" is based on in the chart below.    Truth be told… when you consider the amount of days we DON’T get paid for on a project… 100 days a year of "paid" day rates is probably more realistic for many of you… so you can go ahead and double most of the numbers below if you find that that applies to you.
The graph assumes you buy yourself a professional video camera that you will use over 2-4 years (depending on the price) before it becomes outdated, as well as lenses, accessories etc.   It’s very difficult to guess what everyone spends – but the point here was for me to add as many categories of things we tend to "forget."   We are all well aware of our big purchases, but we tend to forget how small purchases and monthly expenses quickly add up.   We easily forget about CF cards, cables, hard drives, subscriptions let alone business meals.
I’ve added a salary of $70,000 a year here, and I also snuck health insurance in there as well (this will most likely be part of your PERSONAL not business expenses of course but I’m trying to keep everything as simple as possible for now.)   That means that you’d have just under $4,000 per month to live on depending on your federal, state and local taxes which vary of course.
I’ve added little things like holiday cards, stationary, and the costs of promotion in there as well such as cutting a new reel every year.   I’ve also added a personal project in there that you do once a year, just to give you an idea of setting money aside for that as well.    I’ve also gone ahead an assumed you have a business vehicle in there.  You obviously will have to deduct only part of the vehicle you use for business and what part you use for personal if this not a vehicle purely used for business of course.

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