(originally published in Screen Magazine 4/25/12)
Profit. That’s the life-blood of any business. But how do you get there?
A client once asked me how to set aside money for marketing, small equipment purchases, and other incidentals. He complained that although he was busy, there never seemed to be any money left over to grow his business. “Sixty five thirty five” I said. “What’s that, your ATM pin number?” he responded. “Nope, that should be your per-project profit margin” I said.
Many small start-up companies live their business life from day to day. And that’s just fine if you ask me. Do what you have to do to survive your first couple of years in operation. But after that, the best way to set aside cash is to set some benchmarks. The best benchmark is obviously an annual budget. But as I’ve recently learned, very few creative companies put together annual budgets. So, the next best benchmark is a per-project profit margin.
My benchmark has always been a 65% profitability mark on a per-project basis. If a piece of music is going to cost me $4,200 to produce, I believe a fair estimate would look like $12,000. If a video project will take 10 days to edit, transfer, and finish at an average cost to me of $1,500 a day, I’d like to see the estimate at approximately $45,000. The same math can be used when looking at a project’s budget from the other side. If a producer tells me they have $100,000 for the entire production, I need to find a way to exceed their expectations without spending more than $35,000. And if you’re wondering, that $35,000 is a combined daily calculation of both freelance and full-time staff directly assigned to the project.
Of course 65/35 is just a benchmark, something to shoot for. I’ve spent 110% of a job’s budget in the hopes that the work could expand my company’s capabilities and future revenue. I’ve also seen profit margins as high as 90% on occasion. In both cases, I did everything I could to make sure the client was thrilled with the outcome.
So let’s say that you’re meeting your goal of 65% profitability, what does that mean? Well to me, it means that you have 25% of profit you can allocate towards paying your rent and utilities, 20% you can use to pay administrative staff, and 10% you can invest in marketing, small equipment purchases, and other incidentals. So technically, none of that is actually profit. Oh, and the final 10%? The actual profit? Put it in you pocket. You’ve earned it.