Control Over Finances Is Essential For Your Long-Term Business Health
My mother, a brilliant business person, said to me once that “nobody starts a bakery because they want to be running a business – they do it because they love baking”. The same is true for colorists. Over the years I’ve helped a few “one-person shop” colorists work out their finances. It’s made a huge positive impact on their business health by getting a few small things sorted out. It can be the difference between staying afloat – or drowning.
In this Insight, I’ll take you through several exercises you can do, in a few hours, to understand:
- How much do you need to charge per day?
- How many days per month do you need to work to stay in business?
- How do you make sure you can keep your business running and growing, even during the slow months?
My goal for you? Take a half-day (or up to a full day) and follow these steps – setting a solid financial foundation for your long-term creative success. You will build a spreadsheet (and you can tinker with the numbers if you’re so inclined) that will provide you confidence in your daily rate.
Keep in mind, I’m assuming all of these calculations are for a single-person shop! The size of your spreadsheets starts to grow as you add employees or freelancers into your calculations. At the end of this Insight, I share a link to a Google Sheet that shows these numbers in action, that you can use as a basis for your personalized calculations. Let’s dive in.
Disclaimer: I am not an accountant, and this isn’t complete financial advice. It’s part of the occasional mentoring and coaching work I do helping people work out their finances. I try to empower creatives to do this financial work, on their own – in the simplest way possible – so they can continue pursuing their craft for as long as they want to professionally pursue it.
Step 1. Make an Inventory of Your Gear: With A Plan To Replace It
The first thing you need to do is take stock of all your existing gear. Make a list of everything you have and decide how long you can reasonably expect it to serve you. This allows you to determine how much it ‘costs’ per year to replace it. For example: If yesterday you bought a $4000 monitor, with a 5-year lifespan, it costs you $4000/5=$800 per year to save for its replacement. Then divide that annual cost by 12, to get your monthly ‘cost’ for replacing that monitor. You’ve now taken your first step to understanding how much per month you need to earn (and save) so you can replace that monitor 5 years from now.
When you total up all your monthly gear replacement costs – you’ve now budgeted a monthly savings goal. If you can keep to this plan, you’ll always stay keep up to date without taking out unnecessary loans when it’s time to replace your equipment. It’ll also help you determine if it’s less expensive to lease that gear than do an outright purchase.
The total cost per month is a number you’re going to need for the next step. And guess what? You’ve just unwittingly calculated the “depreciation” cost of your assets (if you have an accountant, they’ll be suitably impressed).
Step 2. Calculate Your Fixed and Variable Costs
There are two kinds of costs in a business, ‘fixed’ and ‘variable’ costs.