How much time — and money — would you save if you had a budgetingframework that guaranteed profits?
Cover image via SFIO CRACHO.
The idea ofcharging what you’re worthis more controversial than you might think. Proponents say you should charge what you’re worth — or don’t take on the project at all. Others espouse the benefits of working for free.
Most of us fall somewhere in the middle.
But here’s a fact: a properly crafted budget is the difference between a project that just barely breaks even and one that pays the bills, makes your contractors happy, andlets you reinvest cash into your production company. If you could, how would you grow your business? What equipment and resources would you purchase? Who would you hire?
These are the questions that separate profitable businesses from those that fail.
The Importance of Budgeting Properly
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In fact,most creative businesses do fail. If you’re only breaking even — or worse, eating costs — on your productions, your freelance operation won’t last long.
A rock-solid budget is the key to charging what you’re really worth. But more than that, knowing how to properly budget gives you the confidence that you’re not leaving money on the table — money that you could (and deservedly should) be reinvesting back into your business.
The first step in learning how to budget properly is honing your estimating skills. Like all worthwhile skills, mastery comes with practice and review.
To account for this you should create a budget three different times for each project. Here’s the breakdown:
Budget 1:The First Pass
Your first round of budgeting for a project comes immediatelyafteryour first contact with a potential client, butbeforeyour first concept meeting or initial brainstorm.
This estimate is for internal use, so you usually don’t share it with the client —only the ballpark figure. Thefirst pass budgethelps you think realistically about the scope of the project. Share this with your production team and colleagues for feedback.
Budget 2:The Nitty-Gritty
This is the budget that accounts for every cost that you anticipate for the project. It includes line items for all hard costs and contractor rates, and it factors in a profit margin for each (more on profit margins in the next section).
This is the budget that you’ll share with a client. The quote shouldn’t be a surprise to your client, as you should’ve already given them a ballpark figure based on the first pass.
Budget 3:The Follow-up
By this point, you’ve wrapped the project and have recorded actual costs against your initial estimates. You and your team should scour this to see which items came in over or under budget. Use this as a debrief, and discuss how you can improve your budgeting tactics on your next project.
This is the most important budget that you’ll prepare, and it’s the quickest way to hone your estimating skills.
Factor in a Margin for Freelancers
Image via GaudiLab.
Charging what you’re worth is more than just throwing out your hourly rate. Rock-solid budgets should include all the hard costs associated with the project. Your budget should account for things like gear rentals, music licensing fees, travel costs, contractor rates, and rates for you and your team. However,a proper budget takes things a step further by including profit margins.
A profit margin is an extra amount (usually calculated as a percentage) that you factor on top of a cost or rate to ensure a profit. Without profit margins, businesses cannot expand, and theysee very little (if any) growth.
One of the best ways to factor in a profit margin is by factoring it into your contractors’ fees.
When you build your production team, you’regathering professionals to help you run sound, write scripts, compose music, and ultimately pass their creativeexpertise onto the finished product — and into your client’s hands. On top of that, you’re giving your colleagues and contractors much-appreciated business.
You need to consider the work it takes to assemble that team of creatives.You do this by factoring in a 30 percent-60 percent profit margin on top ofyour contractors’ fees. Otherwise, you’re giving your contractors free work.That’sfine of course, but youdeserve compensationfor the elbow grease it takes toalign creative professionalswith the creative vision of the project.
Without these built-in margins in your budgets, you’re leaving money on the table — and losing out on hard-earned work.
How to Ensure Profitabilityand Grow Your Business
Now that you’re aware of the benefits ofprofit margins and budgeting properly, it’s time to build them into your budgets.
Whether you use Google Sheets, Excel, or Numbers, it’s a good idea to start using spreadsheets to create your budgets — at the very least, for your internal budgets. Using a spreadsheetwill expedite the calculations for things like contractors andother line items.
Here’s the trick: it’s a simple formula that you can add to your spreadsheets (demonstrated above). For each line item (Column A), you should have four (4) additional columns:
- Column B: Your contractor’s day rate(add another column for number of daysbeyond one).
- Column C:Your target margin(if you’re working with the client on price, this is a great place to adjust the numbers).
- Column D:Thecalculated profitfrom your contractor’s fee.
- Column E:The amount for which you’ll invoice your client.
Here’s a scenario: you’recontracting a DP for a single-day shoot.You’ve negotiated their day rate at $1,000. Add this amount to Column B.
This director of photography is very good and will bring exceptional quality tothe final product. Therefore, you assess a 60 percent margin on top of their day rate to account for the quality of their work — as well as the time andeffort required toalign them with the project’s goals. Add this amount to Column C.
In Column D, add the following formula to the cell: =MULTIPLY (B2, C2). This willcalculate the profit.
In Column E, add this formula to the cell: =SUM (B2, D2). This adds the calculated profit to the DP’srate. This is the amountfor which you will invoice the client.
There are tools available that can do this work for you,likeTheBudget Maximizer Tool, designed by Ryan Koral and Matt Davis atStudio Sherpas.
Thetool is essentially aturbo-charged spreadsheet (available in Excel and Numbers) with line items for pre-production, production, and post-production. Each cell has simple formulas baked into the spreadsheet that account for profit margins, allowing you to quickly and efficiently create profit-focused budgets.Italso comes with a one-hour training video that walks you through how to use the tool — as well as some techniques on how topresent budgets to your clients.
By adhering to these practices, you’llsave yourself from eating costs and running over budget, whichis bad for your business and even worse for your reputation.
Looking for more articles on working with clients? Check these out.
- 7 Things All Video Professionals Should Share with Clients
- Freelance Tips: 7 Best Practices for Invoicing Clients
- 5 Ways to Improve Your Workflow with Client Feedback
- How to Handle Negative Feedback From Clients
- Advice on Finding Corporate Video Clients
