Jake and I are here to talk to you today about something that we love, and that is profit.
Why Profit is So Important in Video Production
You really don’t have a business – you have a hobby – if you don’t have profit. Profit is so crucial because it’s what’s left over after you’ve paid for everything and most importantly, after you’ve paid yourself.
Profit is just an operational value that you need in order to be able to do anything other than spin in place with your company. Profit is sort of the, the magic bullet to get forward because of the great things you can do when you have some profit.
Profit Allows You Space to Grow
Profit is crucial because it’s what enables you to invest back into the company. So, things like your gear, things like doing spec work, being able to take a couple days off and still have some money. You can also repay the gear that you’ve already purchased.
These things are critical – and then also having a cash reserve at the end of the day. Our business, like it or not, is extremely volatile. The vicissitudes of making money and not making money, no matter how hard you work to even out your sales pipeline can be very difficult. Things like a pandemic come along and can really throw you off your game. So having a cash reserve that comes from a profit can be can be really critical.
Or even just to fund those lean months. When you have feast and famine. We’ve talked about a little bit in our Season of Sales podcast. You have some of those really hot months where everybody’s calling you and you have some of those months where no matter what you do, your phone never rings.
So How Much Profit Do I Need?
A good number to start with, that is easy to calculate and easy to remember, and it’s a good goal, is about 10% of your revenue. That’s pre-tax, and pre-depreciation.
So if I have a $500,000 in annual revenues, and I’m doing 10% profit, what should I, have left over?
You should be making $50,000 in profit.
And How Do I Properly Calculate My Profit?
The important thing is that you need to include a profit calculation in every project budget that you do. That’s the only way you’re going to get there. You make sure it’s part of the little projects, and it will add up to a whole year’s worth of profit.
But, because of things like overhead (rent, utilities, fixed labor costs) that you may not include in your budget, you need to be sure to account for those, as well. You may not be including what it costs to have a car to drive to the shoot. You may not be including your own hours in, in the way you do your numbers and those all add up into your overhead. And that’s why that 10% can be very misleading. And that’s why a lot of times think, “Well, I had 10% profit in my budget that I got on my Google drive spreadsheet. That I downloaded from some guy’s website and I still am not making any money at the end of the year.” This is because you’re not looking at the whole picture when you do that planning.
The Difference Between Gross and Net Profit
You have two different profit numbers. One is your gross profit. That’s what you need to be making on every project – it includes your overhead. That’s after you paid for those projects specific costs, but not taken into account your overhead. Once you’ve taken into account your overhead – then you have a net profit and that’s that 10% number.
To start, you need to know your goal revenue or what you’re typically bringing in revenue every year. Let’s say it’s $500k a year.
Then, you need to know your net profit percent goal. We’re going to go with 10%. Like we said earlier, easy to calculate, easy to go aim for. So that means I need to be bringing in $50k in profit every year.
So, I START with the $50k in profit, and I add to it, my overhead costs like rent, utilities, and fixed labor costs that don’t go on your shoot budgets. So let’s say I have about $150k a year in these types of overhead expenses. I take my profit $50k I add to it to my overhead expenses of $150k and now I know that I need to be making $200,000 a year in gross profit as a baseline to hit my goals. So that means in my company, if I’m bringing in $500k and I want to hit $50k a year and profit, I can’t spend more than $300k a year in project expenses above and beyond my overhead and profit goal dollars – which comes out to 60% per job.
So, on a single job’s budget – what would I want that to look like? Just on the very top top?
You’d want to spend no more than 60% of that project. On, say a $10k job, you want to not to exceed $6,000 in project related costs. And you want to make sure that you have $4,000 leftover and gross profit.
And what goes into that 60%? Talent. Additional gear beyond what I already have. It can be additional crew that I need. It can be location costs, but you can’t go above that. Can’t go above $6,000. So if you’re going to hang on to 10% at the end of the year, you’ve got to have 40% of gross, every project.
Kind of a mind blower for a lot of people, you know? And that’s why I think you see a lot of folks worried about when they see a new company come around charging really little because they know, well, that’s great, man, but boy, you’re not going to be able to stick around.
Yep. And anybody that has grown from a $100k to $500k has watched as your overhead increases and suddenly you can’t undercut everybody else because you have those overhead costs. You have other people working for you, you have rent. You have an office, You have a car. All those things that you didn’t have when you were just running around with one camera billing $100k by yourself.
Do You Really Need to Hit Your Profit Goal on Every Job?
What you want to make sure is that you’re getting that average across all jobs. There are going to be those projects that have costs that you can’t quite mark up for. The things that we run into the most are travel, locations…talent.
Talent is the big one you have to be careful of.
Speaker 2: If you’re marking up the talent the same way, you’re marking up your costs, your fee, for example, what you’re paying yourself, you can’t really sell that to the client. They’re going to say, this is a thousand dollars talent. Why am I paying 2000? So there are those costs that you’re not going to be able to make a markup. And because of that, every [00:14:00] once in a while, you’re going to have projects that have less than 40% gross, gross profit. That means though that you’ve got to have some projects with more than 40% gross profit, because again, your average has to be 40% across the board. Yep. Yeah.
Speaker 1: And the, and that’s why you start, you know, one of the, the interesting things is that it changes when you start really thinking about profit, it changes the way you think about jobs, quite a bit. You kind of [00:14:30] mature to this higher level where a suddenly, oh wow, we got a $300,000 national ad, but you’re only making 15%, you know, gross profit on it. Uh, suddenly it’s not that great because you, first of all are working your ever loving off on it, but not actually hitting your big numbers for the year. Now, if getting that job means that you are going to get that job on top [00:15:00] of your other base jobs. In other words, pushing your annual revenue up, it, it could actually work out. Okay. But if you’re still within, you know, let’s say you did 500,001 year. And usually the growth rates are around 10 to 15% for a healthy company.
Speaker 1: So you might be doing 600 the next year. You’re gonna, you’re not gonna make it if you don’t, if you don’t have other jobs which are low talent, um, you know, using your own gear, all the things that protect profit [00:15:30] in a, in a job, all the things, things that make the job more predictable. And that’s what, you know, that’s the other thing that sort of changes the way you think is like, you start realizing that having job types within your company, which are predictable in style. We used to do a lot of nonprofit work that were very predictable and big moneymakers. Um, they were nonprofit for us. Um, and you have, uh, you know, jobs that are more corporate [00:16:00] in nature and so forth. Those can often be the engine that helps you then to take on some of the more aspirational, super creative work, which sometimes doesn’t have the great profit margin, but can be the things that keep your company excited about going to work every day.
Speaker 2: So I have to say, first of all, you need to budget for every job because you’re not going to know whether each job is hitting that 40% yeah. Or not. And then you also need to track across [00:16:30] all your budgets. You need to have some kind of tally up as you’re going through the year and say, okay, my revenue has been this, my gross profit has been this, am I hitting my average? And I think if you w when you start doing this exercise of budgeting, every job, you’re going to be surprised at what you see, like max said at hand-crank. We found out that those nonprofit jobs, even though they were less exciting, sometimes, you know, they were, they made [00:17:00] you feel good. They made you feel good, but they didn’t have that razzle-dazzle of that $300,000 national ad, right. There were a lot of $10,000 jobs that we could count on every year for galas, whatever they were predictable every year, they were 10,000 and we made 4,000 on them. Yep. And that was our bread and butter. Yep.
Speaker 1: Yeah. Yep. Motion graphics. Jobs can be that way too. Um, those also can be pretty predictable. They can get a little out of hand if you’re not careful, but they can be pretty predictable and jobs [00:17:30] where you have a really good relationship with the client. And you can always bill for any overages that come along. Cause the other thing of course, that will eat your profit directly out from under you are overages, usually in the editing,
Speaker 2: Overages being ones that
Speaker 1: You’re, that you’re not getting paid for. I’m sorry. I should say overruns or something like that because the things that you are not getting paid for, God help you.
Speaker 2: Yeah. There’s an overage where you do it was, it was known and you get paid for it and you can [00:18:00] mark it up. So that, that overage still hits your profit number. Absolutely. And there are overruns where you just more expense on your side and you’re not getting anything else from the client. Yeah,
Speaker 1: Yeah, absolutely. So it does, it just changes all the saying, is that looking for profit first, after a year of doing this, you’ll see how it changes the way you work and how it makes you a much more thoughtful about certain things. For instance, let’s say you have followed our advice. And after getting past 500 [00:18:30] to 750,000 a year, you have the sales person. Well, one question is how are you incentivizing that sales person? I know it hand-crank when we switched from, uh, thinking about, you know, the total revenue number for the year to thinking more about our, uh, profit for the year. It, we realized, wait a second, we are incentivizing these salespeople. We were paying them a percentage of their total revenue that they brought in. Even if they brought in a job that actually had [00:19:00] low profit. Well, that was,
Speaker 2: And it was a huge mistake because they, those salespeople, obviously, of course being human nature, they’re going to go chase those $300,000 projects just because they want to bring in that then what that top number to look good, that revenue number, because they’re getting paid on that. Uh, instead if you, and they’re going to forget about those low price tag projects that might have a higher margin, those non-profits that we were talking about. Yep. So if you switch [00:19:30] it from a, like, we did a hand crank, we switched it from straight on the revenue to a percentage of the gross profit, suddenly
Speaker 1: Gross profit reminded us what that
Speaker 2: Is. Okay, perfect. So gross profit is the price of the job that you’re paying. You’re billing the client minus the costs that you’re, uh, shelling out on that project specifically. Right? So look again, locations, talent, uh, gear that you’re renting just for that project.
Speaker 1: Yeah. So going [00:20:00] back to our $10,000 job, if I’m paying a salesperson 10% of the gross profit, what would that be?
Speaker 2: Oh sure. So you are paying, if you’re brought in a $10,000 project, you’re spending 6,000 on, uh, on project expenses, you’re left with 4,000. You’re going to pay that salesperson based on that $4,000,
Speaker 1: They’re going to get $400
Speaker 2: Maybe. So you have to make it fair. If, [00:20:30] if before they were getting 10% of revenue and now they’re, you’re trying to give them 10% of gross profit. You got to send
Speaker 1: That number up.
Speaker 2: You got to change your
Speaker 1: Yeah. In fact, I think that’s right. I think our number was closer to 20 or more than that even, I can’t remember, but it’s absolutely, you have to, you, you can easily do the, to make it commensurate with what you were doing before, but suddenly the job types will start changing and you won’t get the crappy job with 400 talent that he paying like crazy. And, and no one’s making any money [00:21:00] because the sales person is now aligned with your profit goals. And that is correct.
Speaker 2: And I got to say in some way, you’ve got to be budgeting that job before you even get it. Maybe, maybe you’re not doing every line item, which I think you should, we can have a whole podcast on why you should be budgeting it before you even get the job. But in some way, even if you’re not budgeting it before you sign the contract, you should have an idea of based on the [00:21:30] project type or based on past experience with this client know that you’re going to hit your, that this job, if you sign up for it and you’re going to get your gross profit number yeah.
Speaker 1: To wrap up. Why w let’s remind ourselves one more time, why that profit is so crucial?
Speaker 2: Absolutely. So it suddenly you have a budget for your gear and suddenly, you know, you could reinvest in your company, whether that be gear, [00:22:00] whether that be a cash reserve, whether that be, um, doing
Speaker 1: Spec work, paying your
Speaker 2: People. Yep. Spec work is a form of investing back in your company. And you can only do that. If you have the profit to support it gear, you know, if you know that you’re going to be bringing in 50 K in profit next year, you know that you can spend some of that for gear and, and you’re by figuring out [00:22:30] which jobs are more predictable and more profitable, you can tailor your gear to those jobs. Uh, you can, if you know that you’re not going to have those 20 talent, $300, $300,000 national ads, then you probably don’t need to buy an Ari camera. You can probably buy a few Sonys and those are going to align better with the projects you’re doing. Yep.
Speaker 1: Obviously you need to be tracking it on a project by project [00:23:00] level pipeline, our software, not to toot our own horn does a fabulous job of that. You can get email@example.com. Um, it does a fabulous job of letting you see exactly where your profit margins are, allows you to set goals visually. Um, for us visual folks that aren’t super into the financials of everything. So that allows you to do it by project. At the moment, we don’t have the ability to track multiple projects. We are working hard at getting that into the software, but you can take those top numbers, [00:23:30] that pipeline outputs, uh, and put them into any kind of spreadsheet and quickly see how you’re doing across the board as the year progresses. Or you can use your QuickBooks that you’re doing your backend accounting with, uh, to do that. Jake, any other ideas?
Speaker 2: Yeah, I, I, we always use QuickBooks to kind of give us that full year profit and loss statement. Uh, and we would also take at the end of every project, we would look at the profit once. And [00:24:00] importantly, we’d look at the actual profit, not how we budgeted it, but how we did against that budget. We’d figure out what that true gross profit was, tally it up. Every single project kept a running spreadsheet and made sure that throughout the year, we were still progressing towards not only our revenue number, but also our gross profit number and keeping track of what that average gross profit was. That’s right. So hopefully this is helpful to you. We hope you’ll take it to heart and we hope [00:24:30] we will see you again on crossing the access, the biz side of video production. Thanks a lot, Jake. Yeah. Thanks for having me. All right. Talk soon.
Speaker 1: [00:06:00] Well, it gets called simple numbers, straight talk, big profits. That’s what it was. That’s what it’s called. Had to look that up real quick, but it’s a little orange book for about 10 bucks, and you’ll make a fortune off the backside of it and do much better. The other thing is, is not accounting for profit and all your project budgets, um, and just generally wind up spinning in the same place. You never grow. Just, just like we’ve, we’ve talked about. So hopefully not, we’ve beaten that to death. Why you need to take profit. Seriously. We only do that because often no one wants to [00:06:30] listen. Um, how much profit do we need Jake? Well, I think,