costing
The Cost of Time
In order to set the price of creative goods and services, you’ll need to know the costs involved. Obviously you cannot afford to sell things for less than they cost! It’s useful to know the break-even point, if only to set an absolute minimum price. As the price goes up from there, so does the profit.
But what are the costs of producing creative goods and services? The direct costs, for example materials, are usually quite obvious and relatively easy to calculate. Fixed costs or ‘overheads’ have to be covered too. These overheads have to be covered by generating income from sales. Each product sold or fee invoiced needs to ‘make a contribution to overheads’.
However it is often the case that one of the biggest costs involved in a creative enterprise is the cost of labour – in other words, the cost of your own time.
So we need to know this cost too, so that we can build it in to the price of products and services. Without this information we cannot know if we are breaking even, selling at a huge profit – or making a loss on every sale.
It would be crazy to sell products without knowing the cost of the raw materials used to make them. Not knowing the cost of labour – which is often greater than the materials involved – is an even bigger mistake.
I suggest that creative entrepreneurs keep a track of their time so that they can allocate this cost to particular products, projects and the general running of their businesses.
Ideally we would like to have precise details, but this is virtually impossible. But that doesn’t mean we shouldn’t do anything!! Even approximate information is really useful. Just having a pretty good idea of how much time is spent on different aspects of the business can be extremely enlightening. It will help you to understand the economics of your enterprise, which is crucial.
So this is what I suggest:
1. Decide your hourly rate. How much are you worth?
2. At the end of each day, jot down approximately how many hours you spent on particular products, projects.
3. Other stuff involved in running the business needs to be counted too: marketing, administration and tidying the studio.
4. Record time as precisely as possible, ideally in 15 minute chunks, though this doesn’t mean you have to stop every quarter of an hour! At the end of the day you should be able to look back and say you spent two hours on A, half an hour on B, and three hours on C, for example.
5. Then allocate a cost to that time invested in each product or project, based on your hourly rate. This will mount up and you can include the full cost when you are calculating prices.
6. The cost of time spent on admin etc needs to be counted as well. This is then added to the cost of your business overheads, alongside things like rent, phone, insurance etc.
Doing this will help you to understand how your business works financially. It can be very enlightening. It will probably mean you reconsider your prices. It might even mean you change your business more fundamentally.
In short, you cannot afford to ignore the cost of your time.
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Further information about financial matters for creative entrepreneurs can be found in the T-Shirts and Suits blog.
Learn more about financial matters on the T-Shirts and Suits Creative Enterprise Network – a free international network of creative entrepreneurs sharing business ideas and information.
Finance is one of the business issues covered in the book ‘T-Shirts and Suits: A Guide to the Business of Creativity’, which is also available online as a free eBook.
Copyright © David Parrish 2010
www.davidparrish.com
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How to create a budget (plus a free tool)
Do you know how much money you make? Or is it a case of “I don’t know – it depends on how the business is doing”.
Whether you are starting a business or growing, you need to know what you are trying to achieve within the business and qualify how you are going to reach your goals, then you can set a budget to help you reach your goals.
Setting goals that affect your bottom line or personal finances are often more motivational than setting a sales target.
This is not a glamorous job but necessary for your business – to control costs, identify problems and ultimately achieve profitability. Creating a budget should have an effect on your business … in particular it should enable you to:
- Set challenging but achievable goals for the turnover of the company and the payments to you the business owner(s) and the staff you employ … you want to be clear on how success in the business becomes success in the team’s bank accounts
- Plan for investment of profits into the ongoing growth of the company … be it investment in R&D, intellectual property, more staff, different skills, board members/advisors etc
- Plan for tough times … knowing in advance where you would make cuts if revenues drop and what the markers are for needing to implement these tactics helps make it easier to do this if the situation arises
- Manage the day to day costs … all the things that are almost invisible except when they are all added up … phone bills for those with international clients, travel in general, last minute couriers. These items can tell you quite a lot about bad business habits and offer the chance to cut costs without reducing the value delivered to clients
- Manage the cash flow challenges that come with projects, temporary staff or product manufacturing … if you have prior warning of when the cash flow hole between needing to pay others and getting paid is likely to occur, then you can negotiate an overdraft or manage the chunks in which you pay/are paid
- This is not an exhaustive list but will probably give you enough to be thinking about (i.e. if you’re not convinced by these reasons we don’t think you’ll do a budget whatever else we may say).
A budget is not written in stone – it is critical to be flexible and adapt to circumstances, have a plan B budget just in case. Indeed for those who come to enjoy excel spreadsheets (honest, some do) then we’d recommend doing an ‘optimistic’ and a ‘pessimistic’ version of both income and expenditure for the year. For those who are less keen you’ll find a ‘what if’ calculator in MyCake which allows you to use sliders and dials to set these assumptions, ne’er a spreadsheet in sight (though we think you should write a few things down as you do this otherwise you’ll forget).
I have laid out a few simple tasks to help you get control of your finances and make the numbers valuable. You will also find a free tool to download at the end of the post to assist you.
TASK 1 – analyse the information you have to hand
- Evaluate every penny going in and out of your business so you fully understand what is going on
- Make sure costs are classified in correct budget lines so you have all the data in the right place
- Look back through the last TWO years and pay special attention to fluctuations. What is your biggest sales month? When are the low periods? When do you hit an expense high? Where do you blow your money? What percentage increase have you seen in specific supplies, overheads and in your sales? If you are a MyCake user, not only can you run a bunch of reports on your own business , but the benchmarks will show you where you sit versus the best and worst in your sector.
TASK 2 – do a first pass at a budget
- Create a base line budget as a guide to work from – start by separating your fixed and variable expenses
- Fixed items include rent, debt interest, insurance and other expenses that cannot be avoided and are predictable
- Typical variable items are salaries, materials, transport, and marketing. Don’t forget the associated costs – for example salaries should also include cost of hiring new people, benefits, NICs etc.
- Do use last year’s books as the start point for creating the budget for the coming year. You can vary it to account for changes you plan this year as a next step.
TASK 3 – take a look at the top line
- Your customers are the best source of information about sales projections – are your customers cutting back or growing? What are they predicting for the year ahead?
- Examining your sales can be by customer or by product depending on how you operate
- Remember that past sales, based on the booming economy or credit crunch, may not give the best prediction for the year ahead
- Build a buffer into your budget to allow for fluctuating prices in materials or loss of a big customer
- Estimate conservatively and create an average price you can apply through the year – eg basic monthly spend on travel or phone
TASK 4 – reconcile your costs and expenses
- Look for relationships between specific expenses such as marketing and your top line so you know where you can save at short notice.
- This also helps to plan a three month cash reserve to cover droughts in cash flow.
Having a budget allows you to be flexible. You can see what the actual numbers are and if you are achieving your goals – it allows you to be able to make changes if you are missing or exceeding your goals. Monitor the budget at least once a month, make mini revisions and change your spending quarterly to make sure you’re on target to reach the goals.
Alternatively have a best case, worse case and happy medium budget so you can fall back or move up as necessary.
At the end of the day you may want to be able to compare your expenses to other businesses, via a professional association, to see how your spending compares to benchmarks in the industry. The more you can do to construct ‘norms’ for your company the easier it will be to compare these to the best in your sector.
MyCake has created an empty budget spreadsheet for you to use for your own business budget – click to download it: sales & cashflow. Feel free to email us if you have questions and please note that we accept no liability for the way in which you use this spreadsheet. I mean, we think it’s sensible, we’ve checked that the inbuilt calculations look right to, but no absolute promises!
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Car Expenses & Buying hardware … how to represent these in your books
As there are a lot of folks doing their self-employment tax returns at the moment we’ve decided to do a few posts in answer to commonly raised questions (so if you have questions send them over 
We’re pleased to be collaborating with Kirsty Andrew of Frank Alice (as she’s a chartered accountant and we’re not!).
Q1 – What do I do about things like car costs and petrol where only a proportion is due to the business?
Ok, lets split this into a couple of more specific questions a) should I put in the whole invoice or just the percentage? and b) what proportion do I allocate to the business?
a) Frank Alice recommends that you just put in the percentage. If you want to keep track of the whole amount then you can of course put this in the notes or the details on your system (for MyCake there is a ‘details’ section to enter text in for every purchase)
b) When it comes to cars the best practice is to keep a log of all the miles you drive for 3-6 months and separate out your business miles from your personal miles. Assuming that these six months are representative of your usual habits you can then reasonably apply the percentage split between personal and business to all your petrol and car related costs.
Q2 – How do I ‘depreciate’ the value of capital items e.g. computers, cars etc?
Firstly it’s good to be clear on the difference between how these are handled vs. direct and indirect costs. Things like computers and cars (also production tooling or equipment) are whats known as ‘fixed assets’ in that you achieve benefits from them across several years not just in the year they were bought. This means that you need to be able to represent their value (albeit decreasing each year as they wear out … there are fixed ways of doing this which we’ll get to in a moment) over several years. This is done on a ‘balance sheet’ rather than a ‘profit and loss’.
The upshot of this is that you will claim 50% of the cost of the item (as a cost, offset against income to the business) in the first year and then depending on what it is claim the remaining percentage in the follow two to four years. This is known as claiming the depreciation of the fixed asset i.e. as you reduce the value on the balance sheet, this reduction is posted as a cost in the P&L so you are able to phase the cost of buying the asset over its life time.
It won’t surprise you to know that there is all sorts of detail behind this short post so if you need more advice we suggest you book yourself a place at our event at the CUBE on 20th Jan from 6.30pm-8.30pm where Kirsty from Frank Alice and Lisa from Boogles will both be there to work with you to get your books into shape for your tax return. Contact Araceli at the CUBE direct to book a place.
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Do I, don’t I, do I need an office?
How do you work out whether you need an office or studio space? It’s a significant part of your cost base if you do so it’s worth looking at the pros & cons. If you don’t what are the reasonable substitutes? If you do how do you choose?
Questions to ask yourself:
- Do I mostly go to visit my clients or do they come to me?
- Would this change if I had suitable space to invite them to?
- Would it make me more efficient if clients came to me? (and would they be happy to come over?)
- What would it add to the client to meet at my site (seeing other work, use of tools that I can only have in one location etc)
- Might it lead to more/new work if they could see more of what I do or the way I work?
- Could I ask staff or freelancers to work on my site and would the team work better if we did this?
- If I’m growing will I be employing (more) staff and therefore need a place for them to work?
- Where would it make most sense to locate myself – near my suppliers, my staff base or my clients?
- What type of space do I need, where does this space exist and what does it cost?
- What is the minimum lease period (managed office space can be as little as a month, vast warehouses might be 20 years)
- How long might I stay there (ie how fast are you growing)
- Will I want to put all the parts of the business in one place or do I want to separate production from sales? ie shop frontage is expensive but warehouses are cheap
If you need a bit of help weighing up the pros & cons here are a few additional thoughts…
- wherever you are it needs to be a place that looks professional to your clients (whatever that means for your sector)
- the space you choose to show clients does say things about the scale of your operations, your professionalism etc so do gie it some thought
- that said very few people are only based in one place these days so meetings in smart hotel lobbies, members clubs, cultural institutions etc are perfectly professional … just make sure you know that the place will be quiet enough (and private enough) for the work you need to do
- if you don’t have space now or if you reckon you’ll be expanding into more/more expensive space soon then plan the additional costs into your budgets & pricing ASAP … if you’re making more profit for a while then great and lets face it no move comes without cost so it will no doubt be fed back into the business to cover move & fit out
Pros of having an office/studio etc:
- it’s your space and you can decorate it to reflect your business
- it’s a place for a team to work and does operate differently to getting a bunch of freelancers together intermittently
- it makes for a steady working environment and this often improves productivity of you and your team
- your clients will learn all sorts of unexpected things about you when they visit and this can lead to new business and/or a change in their perceptions of what you do
- it gives you one place to store previous work, files, all your computers, back ups etc … making it easier to access than if you have to pack it all away out of reach
Cons:
- it’s a committed expense
- you may be committing yourself for a period longer than your pipeline of new work which may feel uncomfortable (you’ll feel more comfortable if you have a proper budget and sales plan to bring in new work!)
- the minimum amount of space you can lease may be bigger than your requirements initially (actually it’s often true that you move into places that are bigger than you need because you’re planning on expanding the business and need not to move more than every 3-5 years)
- there may be a bunch of costs you’ve not thought of until they happen to you (rates as well as rent, business versions of phones, gas etc which are sometimes more expensive than the domestic versions, more insurance) … if you’d like a run down of what these are drop us a line at info@mycake.org and we’ll tell you what we know
So, in summary … if you’re growing a business you need to think about the space that you need not just now but in the coming 12-24 months. If that business needs more people you definitely need to think about this not just because they need a desk or studio to work at/in but because you want to think about the working environment you create for the business. There are plenty of solutions that don’t require you to take on leases. In London MyCake is a fan of The Hub and BASH Studios not least ‘cos we like the people … important to like the people who are around you we reckon.
If you are essentially a one person business and your growth will come through working with other associates then you may not need a permanent office/studio space but you might want to consider how & where the team meets and where you meet clients (ie which members clubs you need to join). When MyCake’s in town we use the Institute of Directors quite a bit because although it’s a fairly dry business space and not as cool as plenty of members clubs it has premises all over the UK, good additional services to members and you can hire meeting rooms as and when needed. MyCake also uses the ICA bar, RORC, Royal Festival Hall and the bar & restaurants of places like the Great Eastern Hotel (top tip – the Knights Bar at Simpsons on the Strand is almost always quiet).
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How does your hourly rate compare?
How does your hourly rate compare?
What hourly rate do you use in your costings? Well here’s how MyCake users vary:
- Great news – there are a bunch of you in this top over £100per hr bracket. Mostly this crowd is selling time in various forms of service – design, management, web and graphic work.
- Reasonable news - the middle groups of £21 to £30 and £31 to£50 are pretty diverse in content – some designer makers, various fashion folks, and various young web designers. Quite a lot of young businesses in here. Make sure you put your prices up as you gain experience!
- Not so good news – just under a third of you charge less than £20 per hr, some are under £10. This is less than labourers on a building site. Think of your skill levels. Surely, you are worth more than this!
Questions:
- on what basis do you decide how to price your work or how to cost up a project?
- how often do you revise these prices upwards?
- how often do others try to negotiate these prices downwards?
- how much contingency for unexpected extras do you put in?
When MyCake interviewed artist Binita Walia about how MyCake makes a difference in this area she commented “I am really aware of the prices I need to charge to survive and how much work I need to bring in per annum.”
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