Profit and Freelance Rates
Now I want to talk about my favorite favorite word profit yes all right we're going to look at a report in the ledger um that is a profit and loss statement this shows you for any given amount of time depending on how you set it up how much profit your business has made and there are two kinds of profit that I include on that sheet on dh that are useful to know the first is your gross profit that's equal to your total income all of your sales minus your cost of goods sold minus all of the expenses associated just with that category right so ah you will add up all the expenses for your inventory for your materials and supplies for your production labor and for anything else like storage product packaging that goes into the actual making of those products that's your gross profit if you do not have a gross profit that is either a positive number or has any wiggle room in it that's a problem in and that's the problem you need to tackle first and foremost that means the products themselves...
are not profitable cost way too much to produce them way too much to make them um and I'm not talking about in terms of your own labor although that is also an issue and we're going to look at that in a moment and how you factor that in when we do the product profitability calculations um but this is just from a materials standpoint uh and any sort of production labor that you hire out this is the expenses associated with making your goods uh if they're exceeding your sales you're already out of business. You're already losing money on every transaction um then there is net profit and this gives you a more general sense of the profitability your whole business this is your total income minus your total expenses this also needs to be a positive number, right? Um in order for your business to actually be a business and here in the u s for tax purposes it will only be considered an actual business if it maintains eventual sustained profit. I'm not talking about the first like to three years in business. Um nobody including the irs expects you to be making a sustained profit your first two to three years in business. Plenty of business is, uh sustain a loss the first or second year um that maybe break even the second or third year that maybe turn a profit after that that's perfectly reasonable no he's going to come after you for that if on the other hand you've been in business for let's say five to ten years and your business is showing very infrequent profit or has never had a profit or is very erratic it's all over the place, then it starts to be classified as a hobby and it can be a hobby business. Um, there are such things that's fine, but for tax purposes, you can't use a hobby business to deduct your other income. So if I'm doing this on the side and I have another day job, um, if it's a really business, I can deduct the expenses I have for my business from my actual from my other income in a year where, you know, I've had a loss where I haven't had a profit, but if it's year after year after year that I'm trying to do this, eventually the irs gets wise now, like, wait a minute that's not a real business, you're not actually trying to make any money here, you're just trying to offset your taxes by calling it a business. Uh, so in that case, they will start to classify you as a hobby, and then you can on ly deduct expenses from your hobbies sales and you won't be able to touch any of that other income if that makes sense. Um, I would say if it's been five to ten years in your business has not turned a profit yet you either need to classify it as a hobby or you need to just, like, tear down and start from square one it's a really long time to go without making a profit um but that's not going to happen to any of you and it's not going to happen to anybody who's watching this class now, because if you're actually doing your careful bookkeeping, you're going to see exactly what products are profitable and by how much you're going to see where your areas of biggest expenditure and where your best sales are, and you'll be able to make adjustments so that those periods of infrequent or erratic profit start to even out and get slowly higher and higher and higher. Any questions about that? Okay, uh, I'm going to move on to product profit, and we're going to look at the product profit calculator in a moment. But just to give everyone at home a little, uh, overview product profit is equal to the selling price of your product, minus the materials minus the number of hours that it takes you times you're freelance ary what on earth is your freelance saree? Well, you're freelance rate is thea amount of money that you would need to make per hour in order to cover both your business and your personal expenses so you would take the number of expenses you have for the whole month. Both business and personal let's say you've got, um, one thousand dollars in business expenses and four thousand dollars in personal expenses that's five thousand altogether and let's say you in my example, I typically say, um I get to spend eighty eight hours also actually making stuff and that's what I'm talking about by number of hours it's the number of hours you can actually create products it's not the number of hours you work on your business in general, so it doesn't include the number of arrows he's been on marketing. It doesn't include the number of hours that you spend shipping things out, answering emails, providing customer service none of that it's just the time that you spend actually making, uh if it's five thousand dollars a month eighty eight hours of actual making per month, that works out to about fifty seven bucks an hour. So that's, why I'm going to use for my example um, do you remember if the freelance rate calculator is part of the materials for this class as well? By any chance I can't remember now the lecture is the product profit calculators ok that's great with freelance rate is available with the bookkeeping calls okay, so there is if you really want help breaking it all down there is a freelance rate calculator is part of the bonus materials for bookkeeping with crafters um, which has like one hundred different categories of expenditures, it's got all of the business categories for expenses it's got all these personal categories for expenses, things like you know housing, entertainment food, pets, clothing, et cetera so if you need help breaking that down it's part of those but we're just we don't really have time to go through all of that in this class unfortunately but let's bring up the spreadsheets again on dh we'll look at the product profit calculator and see how that works out um and if anybody in the studio audience wants to use one of their products as an example, I think that could be really, really fun think about it for a moment I'm going to get rid of these because we're gonna talk about that in a minute as well all right anybody here I'm gonna believe in my fifty seven dollars hourly rate and I've got the gross profit calculation down here again uh does anybody in our studio audience want to offer some information about how it takes to make one of their products? Yeah right yes. Stephanie okay, uh what's the name of your product which which product would you like tio figure out the profitability of um I guess we'll do my most recent one which is the holiday card I have called red panda christmas all right, red panda christmas card um and this is actually going to be I was going to get to a new example like this second you don't print your own cards do you know I don't okay so that's that's a little bit different um let's do something a little bit simpler first if we'll get to that in just a moment because people ask that question in the bookkeeping crafters class a lot of people want to know well how do I calculate the profitability of something where I've spent a ton of time doing the illustration for it on dh then I print an unknown number of them I know how much I going to do or how much they cost for car but the possibility exists that you might print more at some point, right oh yeah yeah well then how do you determine anyway we'll get to that ok all right. We'll just do a made up example that that's fine um unless a man who can we use one of your signs? I love the using real examples of real people with real stuff because we've already looked at your side so everybody knows what they look like now the hand lettered signs let's start with the hand lettered sign and it looks like they're mostly priced around thirty two dollars is that correct? Yeah, depending on the number of words so a lot of my more standard ones are about thirty two ok? So let's use that as a baseline okay? And we'll start with that this'll be a standard one um what are the materials involved in that hand lettered sign so there would be the wood huh and how much does that typically cost um around probably two dollars okay around two dollars in wood uh what else um there's the stain okay and obviously you're going to buy that in like a can use on multiple sign that's super minimal like maybe I don't even know how to guess like twenty cents a sign all right sure yeah we'll say twenty cents ok and then the pain and then the paint okay and I mean that's even less probably like five cents this time okay great sure and the the salty hangar picture yes and those air we figured out yesterday seven cents assign nice okay so we've already figured out those air seven cents per all right great. So the total materials then are all of these added together so your total materials two dollars and thirty two cents per sign not to bed uh let's look at some of the tasks that you are engaged in when you make these things was the first thing you do to make this sign so I guess it would be like sourcing the woods that probably takes we do a lot at once so that would maybe be I mean if we divided all that probably like two minutes for two minutes okay two minutes and then um next would be staining ok so you don't do the cutting yourself no do you pay for the cutting? No no home depot's. Really great thing for you for you. Well, ok stating so how long does that take on sustaining tastes? Well, same thing we do a lot of the same time. So, um, probably like four minutes a sci fi let's say five. All right, five minutes assigned you and then and then what we did and then the the lettering, which is the longest. So that is I met about forty five minutes person all right. And is that it? Is there any kind of like, shellacking or something? That's it about putting the sawtooth hanger on the a minute trick that's easy. We should put it on here, so yeah, yeah, even one minute is worth something that you're doing it five hundred times. Um, at an hourly rate of fifty seven dollars or whatever it is. All right, one minute. So in this case, do you want to put in a different hourly rate? Did you figure out the hourly rate for yourself? I think my hourly rate is probably closer to, like thirty eight. Thirty eight. Okay, sure. That's fun let's put in thirty eight, so total material cost is two dollars thirty two cents. Your total time is point eight eight hours, which at thirty eight dollars an hour comes out to thirty three fifty seven and again, this calculator has all of these lovely formulas built into it already, so if you are downloading it as part of the bonus materials, you don't have to worry about figuring this stuff out. Um, that makes the total cost thirty five dollars and eighty nine cents. You are selling it at thirty two dollars, currently, retail, which means that you're not profit, is a lot of fair minus three dollars in eighty nine cents. It's okay, okay, so this product on its own is not profitable enough to cover both your personal and your business expenses because remember that freelance rate, that hourly rate needs to pay for both your business and your personal expenses. So once you've gotten to a net profit of like anything above zero, you're ok to cover your expenses as they are, that doesn't include anything that you were on to save for in the future. It doesn't include, you know, growing your business or anything like that. But if you want to make sure that your products are profitable enough just to cover your expenses as they are, you need to cut three dollars in eighty nine cents off of this somewhere or ray's, like, raise your price if you major price, thirty six dollars. As opposed to thirty two dollars, suddenly you're in the black, right, right? And obviously, pricing is a little bit tricky and a little bit of an art. We're going to talk about that more later. Um, but this is a really good way to give you a baseline idea of what your products need to cost in order for you to become profitable or to give you an idea of where you need to trim expenses to make them more profitable. That makes sense to everybody, all right? So moving right along. Uh, this is for one sign that you're making one of the time you know, exactly what materials go into it, etcetera. You've got a slightly different, uh, issue in that we're not pricing your cards or rather, we're not calculating the profit of your cards per card because you don't illustrate every card, right she's hand painting, every sign wanted the time so I can account for whore, her labor, her lettering labor on a per sign basis. I have no idea how much the labor costs the illustration labor costs for york greeting card for your red panda card. Because, um, you did it all up front and then had them printed, so the labor cost per card. We'll go down the more cards you get in the more cards you sell right? So unless you've decided I'm going to have a thousand of these printed and that's it and when they're gone they're gone we have to use a different way to calculate the price to calculate the profitability of your product so let's switch it up let's do the red panda christmas card and weaken still account for some of this stuff up front? Um let's go through some of the materials for example and the production labor that go into this so what are the materials that go into producing the actual card printing the card like how do you just get them? The whole thing it's all included you paper card it shows a printed at your door okay, so they charged me for the printing and it should be in handling all right? So if you were to divide that total cost the shipping and handling plus the printing by the number of cards you received about what would that cost you per card plus the shipping and handling including the shipping and handling? Probably I'd say sixty cents for card ok sixty cents great. So we've got that in there but now we have to figure out the cost of your illustration time up front so how many of those cards did you have printed at first? Uh fifty fifty okay great actually printed way more than that so I'm not actually sure how many they gave me but that's how much I paid for you paid for fifty ok that's fine because we're going to adjust that as we go anyway um so you got fifty cards and how much you sell these for right now they're impacts of five um how much pert way had to do everything pretty dollar twenty okay there about a dollar twenty each all right, so from a material standpoint they're profitable right? You paid sixty cents for them you're selling them for a dollar twenty each but are you covering the cost of your labor? Um we haven't figured out your freely and great yet um but you'll be able to do that tonight so I'm going to use my freelance rate just for well actually let's see do you live here in the san francisco in the city I live in oakland so you live in no close enough so I'm gonna use so somebody is amanda's rate not my raid I live in the city and it's a little more expensive all right, so well he is a man who's rate of thirty eight dollars an hour how long did it take you to illustrate do you think to make the illustration for this card uh sixteen hours, sixteen hours? Okay, so sixteen hours if we put that in here that's right illustration sixteen well, I put that in his minutes, sixteen hours, this calculates based on minutes, because most things in minutes, uh, let's, see sixteen times sixty, because I don't know what that is. Offhand rights nine hundred and sixty minutes, apparently sixteen hours. So it that hourly rate uh, it is six hundred and eight dollars, uh, in cost of labor, plus sixty cents for the car. So how many of these will you have to print and sell in order to break even and cover all of your business and living expenses? Well, you'd have to set you'd have tio make and sell let's see, um, six hundred eight dollars at one hundred and twenty per card let's figure that out here, so your total cost divided by a dollar twenty is this shouldn't be this is in the money, but let's, put it here equals six hundred eight dollars and sixty cents divided by a dollar twenty five hundred seven, so you would need to make and sell five hundred and seven these in order to break even on your illustration time. If you don't feel like you're likely to do that, you need to start looking at what's going into each of these cards now, if this illustration is also part of prince and it's, also part of books or comics or other things then you can distribute the cost of that illustration across all of those things um so if you sell about the same number of cards as you do small prince you can take half that illustration time you can take what would that be four hundred eighty minutes eight hours um and you can figure it out that way. So if that were the case this were actually four hundred eighty then your cost is three or four sixty then you would need to sell two hundred fifty four greeting cards and some number of prints depending on how profitable they are based on the price and the materials. Right um so either you need to be doing your illustrations faster or you need to be increasing your sales. You just need to be selling mohr of these things used to be like doing a lot in volume uh or your price needs to go up. Um it looks like the cost of the cards themselves is there's really not much room for trimming that's not really going to save you a whole lot on here and with most creative people most handmade artists it is the time that you spend making that is the biggest cost and, uh the biggest number that goes into these calculations, so any questions about that product profitability, how are we doing online? Well, some people are asking for example that perhaps it was an individual carpet and that's quite relevant to stephanie that's not how you actually use it but obviously the materials accepted we will then be broken out rather and by using a printing service if if you're making the cards yourself and you're doing them you know one of the time than it would uh be much more analogous to amanda's example exactly right you would just put in the amount of time you spend printing one card um I guess if you're printing them yourself then you need to put two line items in here, right? You need to figure out the illustration and the amount of time it takes you to print paper, right? Of course and all the materials yeah, the ink the cards themselves the envelope et cetera s it would be a little bit of a hybrid of those two perhaps um if you're making imprinting them yourself uh if you didn't have a printing service if this were the card and then you had an envelope groups which was another forty cents and then you had ten cents and ink maybe um you got a slightly higher material cost and um if you're printing them yourself and it takes let's say five minutes per card er then you still have this labor cost of three hundred seven dollars in seventeen cents on his total cost of three o eight. Twenty seven. So you would still need to figure that out based on your hourly rate, how many you would need to print and sell yourself in order to maintain ah, profitability. So in this case, we have equals three o eight, twenty seven aa and now the ah, if the sales price is still a dollar twenty, um it's two hundred fifty seven cards, it comes out very similarly. Um, because again, it's, the labor that's. The huge cost, the upfront design. If it's a much more simple design, then you need tio sell far fewer of them than this become eighty, twenty seven, not three o eight. And you only need to sell sixty seven of these to be profitable, which is much more doable.