Turnover & Indirect Costs

This post is a complement to the analysis undertaken for Artquest in the March – May 2010 newsletters. For more details on our partnership with Artquest click here.

Remember – a short column is a good thing in this graph … you don’t want to spend too much of your income on your overheads!

The lesson in here is a simple one – there are some folks who are either in start up phase or have some investment so their cost base exceeds their income (anything over 100% on the graph). This is clearly unsustainable in the long term so the ones to emulate are those in yellow (ie with higher income) and in the average or minimum clusters on the graph.

Sounds daft but you don’t want to be in the brown column in the maximum section as this means you have very little income and yet your costs are way high!

If you’re a MyCake user you can benchmark your own data (rather than just look at these general results) from in the results section of the benchmark. See this post for a how to guide to reading your results.

Tags: artist, Artquest, benchmark, benchmarking, designer, indirect costs, maker, overheads, products, sales, Services

Ellen’s views on the 2008-9 benchmark data

Ellen O’Hara, Head of Business Development, Cockpit Arts and Sarah Thelwall, Founder, MyCake had a long chat about this year’s benchmark data over lunch this week and Ellen kindly agreed to pitch in with a contribution based on a comparison of the MyCake post on jeweller’s and her own experience with the data they gather from Cockpit members. The post below can also be read as a commentary on this post which compares the finances of designer makers and artists.

Some interesting observations here – many of which are supported by Cockpit’s own research into the business models employed by its studio holders.  Jewellers actually make up the biggest percentage of studio holders at Cockpit (22%), followed by textiles (16%) and ceramics (14%), so I’ve had a look at how each of these are doing and what we can learn:

Jewellers
We hold data on a similar group of jewelers to mycake – all sole traders, a mixture of precious and semi-precious, representing businesses at all stages of their career, including some part time businesses.  The main difference seems to be that a higher percentage of our guys outsource manufacture – nearly half.

Our figures also show that, generally speaking, those with relatively high production costs are either gem and/or gold based jewelers.  Or they are jewellers with relatively low levels of turnover (below £20k), but who are still investing in stock.  These tend to be either part-time business (and have an income from elsewhere), or start ups.

Textiles

Our research shows that textile businesses, along with jewelers, are among the best performing businesses at Cockpit in terms of overall levels of turnover and profit, and growth.  Our sample includes sole traders and partnerships, again ranging from start ups to established businesses.

The model here tends to be slightly lower gross margins, but higher volume of sales generated through a combination of wholesale orders, and direct sales via e-shops and selling events to the public.  The majority of these businesses fall under the printed textiles banner, producing homeware and stationary, and tend to outsource a large percentage of production.

Ceramicists

All of our ceramicists are sole traders with some catering for the fine market, some for the craft collectors market, and others the high end gift and interiors markets.
We’re afraid to say that these guys seem to be facing the biggest challenges in terms of sustainability and growth.

Despite the lower absolute cost of materials, direct costs are up to 60% of turnover for some start ups and up to 36% for some more established businesses.  This means that profitability and productivity tend to be lowest within this discipline.

What do the best performers have in common?

What’s clear is that the most successful makers are employing a diversity of business models and strategies.  84% have a strategic business plan, which includes detailed financial forecasts and budgets, and their business model is fit for purpose.

All have a strong USP, good profile in their chosen market place (however niche), and robust business processes.

The most profitable businesses are split between:
1.    Those with higher gross margins, who tend to sell smaller volumes at higher prices and generate sales through a mix of private commissions, direct sales (with Open Studios and other high profile shows such as Origin and Goldsmiths), supported by some gallery / retail outlet sales.  For this group, direct costs are a lower percentage of turnover (no higher than 26%), with the mode being just 15%.  They become sustainable at around the £60K turnover mark.
2.    Those who rely on a higher volume of sales tend to outsource production, and reach their market via trade shows, have a greater dependence on wholesale orders and on-line sales, and take on fewer private commissions.  Evidence suggests that turnover needs to higher in order to be sustainable at around the £100k+ mark.

So in addition to Sarah’s sound advice, I would add:
1.    Consider gross margins when developing your new pieces and collections.  Be aware of which products (or services) offer the most profitability and use this to inform your sales plan.
2.    If you can’t increase your margins and need to go for volume sales, ensure you have the production capacity to cope with this level of activity.  Explore different options – outworkers and batch production, outsourcing to a factory, collaborating with a partner who does have the production set up, or licensing.  Efficient production also means you are more likely to cut down your lead times, which will help encourage repeat orders and respond to those retailers who are employing a ‘just in time’ approach to placing orders at the moment.
3.    Being visible is important, but don’t fill galleries with SOR stock at the expenses of your cash flow unless you know from experience the work will sell and you’ll be paid in a timely fashion.  If you are a precious metal or gem based jeweler – consider SOR as a pr activity as opposed to relying on it as income – and be discerning about the outlets you choose to stock.  Do keep regular stock takes and pull your work out of outlets that aren’t shifting your work within 3 months (6 months max).
4.    Introducing a less precious range, or using a mixture of materials, may be a way of increasing overall profitability.  Similarly, you may be able to add value by introducing more ‘precious’ materials, or introducing optional product pricing and offering additional extras to bump up the value of each sale.
5.    Marketing budgets are interesting one.  On the one hand, if profits are being squeezed then you may need to shave costs.  However, this should not be at the expenses of sales.  Use a system like Mycake to conduct a cost / benefit analysis of the different marketing activities you engage in – how does the investment compare with the sales (and pr) gained, and under what timescale (in other words, what is the return on this investment and how long does it take to reap rewards?)  Could some, or all, of your limited budget be put to better use?

Overall improving you financial literacy needn’t be scary and crunching the numbers can actually be really satisfying once you know what you’re looking at.

Cockpit will be providing plenty of financial related support in 2010, so keep an eye out for our business and professional development events programme.

Tags: artist, benchmarking, creative, designer, MyCake

Benchmarking artists vs. designer-makers (2008-9 data)

We’ve been comparing MyCake data for 2008-9 between artist users and designer-maker users.

This makes for some really interesting comparisons between two types of object/product based practice.

• In both cases we are looking at sole traders (some have a ltd company others just registered as self employed).
• In both cases there are sets of figures for folks with less than five years experience and people with 10-20 years developing their practice.
• As two clusters of MyCake users both have an average turnover of <£50,000 … it’s worth noting that MyCake has two distinct groups of users … individual makers of various types who tend to turnover <£100,000 vs. small creative firms with 2-10 employees who turnover £250,00-£2m per annum
• Artists tend to charge a higher hourly or daily rate for their work than designer makers .. there are more artists in the >£50/hr range whereas there are all too many designer-makers in the <£20/hr or worse still <£10/hr range
• Designer-makers tend to have a higher total turnover than artists
• Artists don’t tend to use bank debt or supplier credit ie they use the income they generate but don’t borrow
• Designer-makers on the other hand do use loans
• Whilst Designer-makers may have a higher turnover they are also more likely to make a loss … they are taking more financial risk (borrowing, sale or return, expensive materials) and thus there is a greater impact if they get it wrong.
• None of the artist data we have indicates a loss (though there are times when there ain’t much profit!)
• Very few are making payments into a pension
• Artists tend to pay themselves a higher proportion of the income they generate, Designer-makers less so (due in part to higher costs but also because more designer-makers run a limited company so leave the profit in the company … we suspect that fewer artists have a business bank account and run everything through their personal bank account … if so is a bit harder to leave the profit lying around, is more likely to get spent)
• Both show examples where the income streams have diversified … sub-letting studio space and doing teaching are both fairly common
• Designer-makers tend to spend a higher proportion of their income on the cost of materials than artists do
• Neither spend much on ‘research’ or ‘development’, nor much on training … partly because there’s not a lot of profit to spend on these items … there’s not always much to pay yourself a wage either!
• Designer-makers do spend on marketing, artists less so

What do we learn from this?

Designer-makers

Instinct says that neither group uses their financial information to help them make decisions about their future. We’d love to be wrong on this … please do vehemently & publicly disagree (and tell us how you use such information!). In the main we see designer-makers logging in to MyCake more often than artists so we’d say that they probably have better processes for inputting their data. Even so we don’t think that either artists or designer-makers are using that information for their own benefit, it’s really just a one way feed of data to the tax man. We’d really, really like to help change this!

The profitability issue is one we’d like to look at further. It’s one thing not to make much money from your practice if you’re investing in long term development or if you have an income from elsewhere (after all these are your choices to make) but if you’re trying to grow the business and your patchy cashflow is hiding a profitability problem then there is more here that needs looking at.

We’ve done a few in depth 1:1′s recently and a couple of things have emerged from these that we think are relevant more broadly. If as a maker you led an innovation or a design trend a few years ago but since then it has become fairly mainstream and other designers or even larger production houses have followed suit you may well now struggle to keep pricing competitive unless you’re selling in volume and achieving reductions in the cost of production. If you’re still making the work yourself or producing in small batches (00′s rather than o00′s) then whilst you’re competitors are bringing down prices because they’ve brought down production cost any reductions in wholesale or retail prices are just eating away at your profitability. This is a very real problem and not one you have a great deal of control over unless you can magically increase your sales volume.

That said there are ways to focus attention on a smaller percentage of your overall range so that you raise volumes of sales of key items. Plus if you plan new products differently so that there are fewer items in a range or product then instead of making 6 different plates for a set you’ll have three pairs of two in a set and thus automatically increase the order volumes as it will be spread across three items not six when manufacturing.

Ultimately if you’re making your own work you have two choices

• stay at the forefront of innovation in your sector, stick to small volumes and high prices and complement this with undertaking design commissions for larger manufacturers where you achieve a royalty but they do all the production and selling
• build up  the volume of sales and as you do so outsource production and seek cost efficiencies. This model requires you to focus heavily on sales as you will need a lot of outlets (by which we mean hundreds and with an international spread)

Artists

Looking at the artists who use MyCake most frequently I’d describe them as folks whose main goal is to make a living from the sales of their work as early in their careers as possible. Based on a decade’s experience of working with artists of all types I’d therefore make a clear distinction between this cluster of what I’d call ‘retail’ oriented artists vs. those who are aspiring to be a Turner Prize winner ten years from now. This distinction is important because the latter crowd tend to be judged as ‘selling out’ if their work sells too soon or too easily (there was greater flexibility when the contemporary art market was booming but in tough times it is back to it’s old ways) whereas the ‘retail’ folks are applauded by buyers, peer artists and commercial galleries for being business savvy enough to recognise market forces at work and play to their  strengths. We’re making no comment on the pros and cons of these two career paths but instead just separating them.

The rest of this commentary is therefore focussed on ‘retail’ artists and is aimed to help them make the most of their market.

The good news is that artists don’ t tend to get themselves into debt as a result of their practice and its development. Instead they work with the cash resources they have. The flip side of this coin is that this can be a limiting factor in the growth of sales in so far as the ability to invest in the business is limited by the money you have to hand. This is low risk but potentially low return also. Are there times when you would benefit from producing a catalogue about your work (perhaps with the assistance of a gallery you work with?), would your website benefit from development, would hiring an assistant or someone do to marketing/PR be likely to increase your sales volume or your prices? Might you benefit from hiring a gallery and making sales direct rather than going through an established commercial gallery? The trouble is that if you never have the resources to experiement on a few of these things you will not be able to reap the rewards from them.

If you could make a few more sales would it give you some extra cash to invest in your growth and development?

Over the longer term what are your pension plans??? Make no mistake, you’re no worse off than most creatives but we’re pretty perturbed by the overall lack of pension provision amongst creative entrepreneurs so it is a drum we are going to bang more loudly in the coming months and we’re starting here, we’re starting now!

Final point – we’re already being asked if we’ll analyse other sectors … architects, designers, glass artists, software and games folks, media freelancers, graphic designers etc etc. The answer is we’re planning to. You can help us get to this quicker by advocating that individuals and companies alike start to use MyCake for book-keeping and/or benchmarking of their financial data. If you do your books on other software you can of course just use MyCake for benchmarking.

So, sign up for a two month free trial and put in last years figures!!

Tags: artist, business advisor, business growth, designer, designer-maker, maker, pricing, profitability

A benchmark just for jewellers (2008-9 data)

As we have quite a cluster of jewellers using MyCake we thought we’d do a brief benchmark just for this sector. Here are some of the highlights:

• All the jewellers are sole traders with two thirds making all their own work (the other third subcontract some of their production either to other jewellers or to manufacturers).
• There is quite a variety between those who use a lot of gems vs. those whose work is mainly silver based or made from non-precious items.
• Those who use a lot of gems unsurprisingly show a very high cost of production … up to 73% of turnover is spent on materials … In all honesty we think this is too high because it means that the income for the jeweller is a pretty small percentage of turnover ie a lot of risk for very little return particularly if you’re working on a sale or return basis
• By contrast those using less precious materials may spend as little as 10% of turnover on materials giving a high gross profit … averaging around 80% in this subset. This model offers better profitability i.e. the design value is a higher proportion of the total value of the piece whereas in gem jewellery the design value is smaller and the gem value is what is driving the prices
• Cashflow is very sporadic in both sets as you’re making an outlay on materials that is often not directly connected to the fulfilment of an order (also true for many/most batch production oriented designer makers). Equally your income is lumpy either due to the way orders are placed or because SoR retailers only summarise their sales and make payments monthly or quarterly so there is often quite a delay between a sale by them and payment to you

What does this mean for the way you run your business i.e. what can you do about it?

• The greatest risk of lumpy cashflow is that, particularly in a tough economic climate, you end up making a loss when you look at the year as a whole but it is hard to see at the time due to the up and down cashflow. There are a clutch of designer makers who suffered from this in 2008-9. The good news is that you can offset your losses in one year against profits in another in terms of your tax return. DO THIS!
• Analyse where the money is being held – do a stock take and make sure that you’re not tieing up too much money in stock (raw materials in the studio, finished product in the studio, finished product with SoR retailers). Aim to sell off your excess stock to release some funds and work out which of your SoR retailers are actually worth holding stock with i.e. if they demand a lot of stock but sell little are they worth it?
• If the greater value is in the design rather than the gems (only you can tell this for your business) then consider having a less precious range e.g. silver not gold and aim to make this a steady earner so that the high value gem based work becomes the glittery piece that catches peoples eye but if it’s out of bounds for many then they walk away with a silver something.
• Remember that you see a greater proportion of the sales price in private commissions than in sales through retailers so if you’re gem based then growing your private client base will help improve the profitability of this work. Plus you can make to order rather than speculate on SoR work.
• Be careful with your ‘marketing’ budget … I’ve seen makers who’ve had a bad couple of years borrow against their personal assets e.g. mortgage in order to use the money to pay for trade fair stands. You might do this at a push for one year but the risk here is that you are increasing your debt but putting it into a business that has a reducing ability to pay the debt off. Long term this spells trouble! It is awfully tempting to think that ‘if I could just go to X I’d make enough orders to put me back on track’ … this is getting all to close to the gambler on a losing streak betting larger to bring themselves back to zero! The tough alternative is to cut your cost base and work your way out of tough times by taking the work that you’d shun when all is going swimmingly … for some that’s pieces of teaching, a part time job, less interesting commissions, selling off stock at retail (rather than trade) fairs.

Ultimately you need to keep better track of your finances. MyCake is of course one way to help you do this but software alone is not enough … you need to be looking at your figures on a monthly or quarterly basis, not just looking at your income but at the profitability and the cashflow. This is predicated on the idea that you’re entering data regularly (weekly or monthly) so that you can look at up to date information … so the message here is that the process matters as much as the software. If you’d like a hand looking at your business, your profitability and your cashflow then do drop us a line to marion at mycake dot org. See also our current offer whereby new and renewing users who sign up for an annual payment by the end of Jan are eligible for a free 1:1 session.

Tags: benchmark, designer, designer-maker, jeweller