% of Net Profit to New Equipment/Marketing
Hi everyone, I have a question on budgeting or how much to spend on new equipment/marketing/education. I currently am a one man band for writing, shooting, editing, and motion graphics, but I am planning on getting an intern this summer and hopefully bringing on some assistance in the fall.
My question is, does anyone have a particular % of your net profit that you put towards new equipment or marketing? I am a Dave Ramsey follower and his system has helped my wife and I get out of all of our debt (personal and business) super fast. I love having a system but haven't been able to get a handle on my business finances the way we have on our personal. The business is debt free, but I would love to get a scale on what others do. I know of some companies that never buy new gear and some that use their business as a way to fund their video hobby. I certainly am in the middle but much closer to the conservative side.
How does this formula sound? After putting 30% of sales away for taxes, then paying myself a set salary, and expenses (so net profit for a given month or quarter) I would spend this:
10% New Equipment
1% Continuing Eduction (workshops, books, etc)
Thanks for your thoughts. :)
I don't use any sort of a percentage for purchasing new equipment. My formula that has worked well for me for 9 years now is quite simple.
1 - Is there a need for this particular equipment?
2 - Is there a job or multiple jobs in place that will pay for this equipment?
If the answer to both 1 and 2 are "Yes" then I purchase it. I am of the mind that you purchase the gear when it is needed and I will gladly lose money for a few jobs to pay for it. Then it's profit on that equipment for the life of the gear.
I never purchase anything because "This will get me more clients if I have this new widget." I purchase equipment because there is a need for it right now and it will serve our facility in the future. If it won't serve our facility in the future, then I would rent the equipment or out source the job.
Walter Biscardi, Jr.
Editor, Colorist, Director, Writer, Consultant, Author, Chef.
HD Post and Production
Biscardi Creative Media
"Foul Water, Fiery Serpent" featuring Sigourney Weaver coming soon.
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I agree with Walter, primarily.
The exception is the situation where I think the OP finds themselves. They have not yet acquired much beyond the most basic means of production so that they're still building basic capabilities. So a "budget" of investing a percentage of after tax profits toward basic capital expenses like grip gear, enhanced audio assets, and editing upgrades makes some solid business sense.
Depending on your cash flow, I'd bet most of us who've been in business for a while had a significantly larger percentage of profits that we re-invested in equipment in our early days. I don't think 10%, 20% or even 50% is unreasonable - particularly under Walter's reasoning if you don't have camera, grip and audio done at a level commensurate with the work you expect to do and you have a workflow that will support it.
The tradition was that you ate Ramen and road a bike early in your career in order to afford the VERY expensive tools of the trade. Now that tools are more affordable - it won't be as long before you move from Ramen to Spaghetti, then to actual Chicken.
But fundamentally, Walter is spot on. After you have the basics, buy ONLY what your market tells you is CRITICAL for on-going production. NEVER think that the mere purchase of a piece of gear will automatically bring in the work to pay for it. That era is DEAD.
Wow, this is awesome! Thanks a ton Bill and Walter. :)
Bill, you really did spell it out for me so that I could understand the "basics" of production. I'm really trying to start fresh in 2010 and we have been in business since 2007. So by the beginning of 2010 we own (fully paid for) an HVX200 with accessories, Tripod, 17in MBP for downloading footage in the field, 1-Wireless Sennheiser system, FCP6, CS4 Production Suite, office equipment, and a really cool IKEA desk!! ha ha, over dramatizing the desk. :)
So our gear was mostly purchased in 2007 and 2008, then we paid off our loan in 2009. So for 2010 we have been able to upgrade our editing system, purchased the Digital Juice Motion Designers Tool Kit (which as allowed us to have a Motion Graphics add on to our packages and our clients are loving it), and purchase a computer for my wife to do some admin stuff. All paid for, so no debt.
Then this hit me in regards to purchasing gear and how much % is too much. But I love that thinking of .... "purchase equipment that you can use now and a need for future jobs, but for me to stay maybe within the 10%-25% range until the basics established. Which for me the only thing that I would say that I could use is certainly a lighting kit. Which we use on about 60% of our jobs and we always have to rent an Arri Kit for $90.
But thanks for your help and thoughts. Budgeting and cash flow is an interesting topic for me (I know there is a lot of room for improvement)! :)
After years of doing this part time I am in the process of launching a full time video business.
After expenses of paying crew, rentals, etc. my plan is
1. Pay myself 30%
2. Invest 30% back into my business
3. Save 30% for taxes.
4. Have 10% for misc.
Investing includes marketing, new equipment, trade shows, etc.
I think in a start up business situation you might need to allocate more to marketing.
I would look online for a used arri kit, they are durable.
I just finished the Dave Ramsey class by the way.