Making Profits From Better Business Management
You are in the business of photography to make money but often photographers do not know how to manage their business to make a profit--or even where profit comes from! To help you better manage your business to make a profit, we interviewed Tom Zimberoff, author of Photography: Focus on Profit (www.allworth.com) and founder of Vertex Software, Inc., the publishers of PhotoByte 2000. Zimberoff is a commercial photographer and photojournalist whose photographs have appeared on the covers of Time, Fortune, Money, People, and numerous other magazines. He teaches seminars on the topic of photo-business automation at universities and trade schools such as RIT and the Art Institute of Atlanta. His new book, Photography: Focus on Profit, provides tools for a profit-making photography business as well as a free software program that fully automates business operations. The PhotoByte software automates and manages routine business administration and includes the licensing of electronic rights.
Shutterbug: It may be obvious but, for all of our readers, explain the concept of profit margins.
Tom Zimberoff: Specifically speaking, profit margin is a method used to price yourself competitively in the marketplace. It is the percentage of profit compared to total revenue, excluding assignment fees and sales tax. Rent and utilities, salaries and benefits, insurance, camera equipment, and office supplies are all excluded, too, because they are not billed directly to your clients. Assignment fees are excluded because they represent your personal salary. Sales taxes are not included because they are collected on behalf of and remitted to the state. Only direct costs are used to calculate profit margin. Direct costs are associated with and charged to specific photo assignments. They include assistants, travel, rentals, film, and processing. It might seem clearer to think of profit margin as a measure of the relative proportion of profit to your overall income, not the actual amount of profit earned. Here is an example of a simplified invoice:
Direct Costs (not disclosed
to client): $200
The difference between direct costs and billed expenses is considered direct profit, part of the gross profit. So, too, is a usage fee, when it is billed separately from an assignment fee. The profit on billed expenses in this example is $50 (e.g., billed expenses minus direct costs, or $250 - $200 = $50). Marking up the direct costs at a discretionary percentage rate derived the billed-expenses figure. In this case, $50 equals 25 percent of the $200 it cost to produce this assignment, so the markup was 25 percent. Add the $50 profit to the $200 usage fee, and the gross profit for this job equals $250.
SB: Explain the relationship between break-even point and "markups" and what it means for a photographer on any given job.
TZ: Obviously, a distinction is made between what is a cost and what is an expense. A cost represents the actual price you pay for supplies and contract services. An expense represents the amount you bill for those same supplies and services plus a markup. No markup means less profit!
For every direct cost there is a corresponding billed expense to be itemized on your invoice that should include a markup. You and your accountant will determine the rate of that markup percentage. It is based on your total annual overhead (direct costs plus indirect costs) and how many assignments you typically shoot per year. In other words, you have to use your spending history to make an intelligent guess about what it will cost to run your business for the coming year. The figure you come up with is your break-even point. On top of the break-even point, you have to add how much money you need to fund the further growth of your business. That amount of money (e.g., profit) will be invested in expanding your marketing activities or to buy new equipment; anything that you expect will help increase sales. That's the whole idea behind making a profit.
SB: How have you addressed this issue in your software?
TZ: Once you have settled on a rate, you may enter it in the Preferences section in PhotoByte that can automatically calculate both gross profit and profit margin for every subsequent assignment you shoot. The information is clearly displayed on screen (for your eyes only) on every invoice you create. In fact, even as you prepare an estimate, PhotoByte shows you cumulatively--line item by line item as you go along--exactly how much profit you can expect to make on that job.
Here's how monitoring your profit margin can help you better manage your business. For example, if you are billing 10 percent more jobs, your business can earn just as much profit by marking up costs, say, 30 percent instead of at a previous rate of 40 percent. That will lower your prices and increase your salary at the same time, because assignment fees are unaffected by lowering profit margin; e.g., if you shoot 10 percent more assignments, you collect 10 percent more take-home pay. That's like giving yourself a raise. But with the lower margin, your prices remain at the same competitive level.
SB: What if a photographer wants to make more profit but can't increase the number of jobs?
TZ: Even without increasing the volume of your business and cutting margin, there is another way to increase profit. You can cut direct overhead instead. Shooting assignments that cost less to produce allow you to increase profits without raising prices or lowering profit margin on an increased volume of work. In fact, your profit margin will go up. In other words, just because you've found a cheaper source for film and supplies, or you pay less for a new stylist or assistant, doesn't mean you have to charge less than you did before. You may continue to bill your expenses at the same rate you have all along. That will increase your gross profit. Enjoy the savings!
SB: How does automating business management help a photographer be more efficient?
TZ: Using computer software to guide photographers through the complexities of business management--which includes marketing and self-promotion--provides them with not only the what-to-do part, but also the how-to-do-it part. It systematically helps photographers achieve their goals.
It's hard to stretch one day into more than 24 hours. Even savvy shooters used to ignore good business practices, because they had no capacity to address the perplexities of business management while trying to shoot pictures at the same time. That dilemma no longer stands in the way of making a living and earning a profit. As more and more photographers who possess not only a sophisticated understanding of business but the means to apply their knowledge in the marketplace, new standards will begin to emerge.