Why Video Producers Should Budget for Profit Margins
How much time — and money — would you save if you had a budgeting framework that guaranteed profits?
Cover image via SFIO CRACHO.
The idea of charging what you’re worth is 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, and lets 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
Image via lOvE lOvE.
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 immediately after your first contact with a potential client, but before your 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. The first pass budget helps 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 they see 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’re gathering professionals to help you run sound, write scripts, compose music, and ultimately pass their creative expertise 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 of your contractors’ fees. Otherwise, you’re giving your contractors free work. That’s fine of course, but you deserve compensation for the elbow grease it takes to align creative professionals with 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 Profitability and Grow Your Business
Now that you’re aware of the benefits of profit 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 spreadsheet will expedite the calculations for things like contractors and other 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 days beyond 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: The calculated profit from your contractor’s fee.
- Column E: The amount for which you’ll invoice your client.
Here’s a scenario: you’re contracting 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 to the 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 and effort required to align 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 will calculate the profit.
In Column E, add this formula to the cell: =SUM (B2, D2). This adds the calculated profit to the DP’s rate. This is the amount for which you will invoice the client.
The tool is essentially a turbo-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. It also comes with a one-hour training video that walks you through how to use the tool — as well as some techniques on how to present budgets to your clients.
By adhering to these practices, you’ll save yourself from eating costs and running over budget, which is bad for your business and even worse for your reputation.
Looking for more articles on working with clients? Check these out.