Overview Of Costs
We are going to talk about where the money goes. This is often the black hole of this industry. We can have so much money coming in and be so successful and then there's that camera that is so cool, or that lens that's amazing, or that software that's gonna change my life, so let's talk about the not as fun things to talk about. Like where the money goes. So there are basically four categories that you need to keep track of on how the money exits your business. The first one is the cost of sale, or cost of goods sold. Those are interchangeable terms. We talked about costs earlier. The cost of sale is how much it cost you to make your product. So that would be the prints, that would be the frames, the albums, the jump drives, the things that you hand to your client. There are industry standards for all of this information, and I'm gonna walk you through that in just a minute. But know that you should plan on spending about 25%. 25% to 35% of every dollar that comes into your business on...
making your product, okay. That's where that mark up factor of four came from that we talked about earlier. 25% is a mark up factor or four, that's where this came from. So, general expenses are the expenses that you incur every day as a business whether or not you have a client. So that would be your utility bill, that would be your rent, that would be your website hosting, that would be your accountant that you pay, all of those things that happen whether or not a client buys anything from you, those are general expenses. And you should plan on spending about 30% to 40%. It's always better to spend a lesser percent than a greater percent, so general expenses are what happens whether or not you have a client. And there are seven sub categories that I like to use in our business under general expenses. So the first one is employee expenses. The first time I ran that number we had an employee and I realized they were making more money than me. Big mistake right? So I decided that I would rather keep that money and do the work myself. Sometimes that's not always the best decision but knowing that information is power. Outside services that would be contract things. So if you had somebody that came and mowed your lawn, or did a specific job for you, that would be an outside service. Then overhead expenses, this is if you have a space where you conduct your business. So if you have rent, or utilities, or something like that. If you're a home based business and you work out of your home, this isn't something that applies, although you should be deducting that on your taxes. But this is different this is for managerial accounting. Advertising, you're gonna have some money there. You wanna know how much you spend on it. That was the other thing, the first year I started tracking this I realized I spent more on advertising than I did paying myself, another big hard lesson learned. Accounting and legal, how much are you spending on that? As you start up it's gonna be more than as you get well established. Administrative, so this is like the day to day stuff. It has to do with office expenses, postage, telephone, props, accessories, and then I added one, so here's where you get to make a choice in your business. Sometimes you can put education under administrative, sometime it warrants it's own category. And it depends if you're starting out and you're needing to learn a whole lot of information and you're spending a lot of money on that. That's really important as you're growing your business. And so if that's a big chunk of where the money is going in your business it's probably worth a separate category. If it's something that's not a huge chunk of your overall sales, of your overall revenue, then you can mix it in with the administrative category. Totally up to you, what works best for your business. Ah, the next one. Capital expenditures. This is the good stuff that we all love as photographers. It's cameras and lenses and computers and software and all those things that make this so much fun. And here's the thing. The industry recommendation is you get four to nine percent. Of your gross sales on capital expenditures. So let me break that down for you. If you bring in $10,000 of sales, that means you get $400 to $900 to spend on equipment. If you bring in $100,000 of sales, you get $4,000 to $9,000 to spend. Ouch, right? That's like a camera, sometimes. So, here's the thing. Is that you need certain equipment to do your job. This is an equipment intensive industry. But you have to find balance to having the equipment you need to do your job, versus, what you want to do your job, and they are very very different. Peter and I in our business have a very different opinion between those two things as the person that watches the numbers versus the creative in our business, we have long discussions about whether a new piece of equipment is critical or not. And if he can prove to me that this lens or this whatever will enhance our business and bring in revenue, then great, we get it. If not, it's gonna have to go on the table until we surpass our sales goals for the year. It's reasonable, that way he still gets to create, he still gets to expand his artistry, but only after we have made our minimum gross sales. Okay, so be careful on this one. I know, it's hard, just be glad I'm not in your ear saying don't buy that. Poor Peter. And then the last one, the most important category of all of these of where the money goes and why we actually have a business is owners compensation. Yay, that's why we're working for this. So this is every dollar that goes to your personal wellbeing. So it includes the money that gets deposited in your bank, it includes the taxes that you pay, it includes your health insurance, it includes your retirement, anything that goes to you personally. Okay? [Indiscernible] The question is what was the part about taxes? And so when you work for somebody else, you get a paycheck and it has this little list that says, social security, fica, fuda, all of these things and that's something that the company is withdrawing out of your paycheck, so that's still part of your overall salary, the same is true as a business owner. You still have to pull all of those things, and pay them to the government. And so that still counts as your overall salary, even though it goes straight to the government. That one really hurt. When I started doing my own payroll for the first time I became aware of what all those numbers actually were, before I always just looked at the amount that I got paid. And when I looked at the amount that I started with versus what actually went into my bank account, it hurts. It's hard, that's a hard thing that I wasn't quite as aware of as I should've been as an employee instead of an employer. Okay, alright, so, let's practice categorizing expenses. So we have these four categories, cost of sales, general expenses, capital expenditures, owners compensation, and you have a UPS receipt from shipping an order to a client, and you are filing it, and you know what, let's do it quick so that we don't have to pass the mic, just shout it out, what you think it is, UPS receipt from shipping an order to a client, which category, one two three go
That would be cost of sale I thinK?
Cost of sale because it's an order to a client. If we didn't have a client purchasing something we wouldn't have this expense. Great job, way to go. A lab bill for the month of October. So this would be whoever is printing your products. What was it?
General expenses, tell me what you're thinking a little bit about that one. Why is it general?
It's general because it's not specific to a certain client and it's just an overall cost of running your business.
Okay, so the idea is right, it's a general cost, exactly however, when I was writing this I was thinking this was the lab bill for all the printing for client orders, so it could be different things. So if it is the lab that's creating orders for you, it could be a cost of sale, if it is a lab bill for generating samples, for a marketing plan that you're doing, then it would be a general expense, you as a business owner would know that as you're entering these into your accounting software. So that's great, okay, we're gonna go through these quick. A deposit into your HSA account would be? Owners compensation, right? Okay let's blast through these. A bill from your album designer. An album designer is working on client orders, so it's going to be cost of sale, okay? We'll do a couple more. A payroll for an employee who does your framing. So this is the person that puts together a client order, which would be cost of sale, yes. Compact flash card, oh this is a tricky one, where does this one go, something you put in your camera, okay, this one's a tricky one and there's lots of different ideas out here about this one, so here's the deal. It doesn't really matter where you put it as long as you do it the same way every single time. If one compact flash card goes in general expenses and one goes somewhere else, then it doesn't tell you any information about your business. I personally put compact flash cards under general expenses, an account that I have a sub category for props and accessories. So I put batteries, I put compact flash cards in there, I put park passes that I have to do to access wild places, all kinds of things like that go in that props and accessories sub category for general expenses for me. Stamps, this is another tricky one, because it can go in a couple of places. So if it's a stamp, that I'm using to mail something to a client it would be cost of sale. If it's a stamp that I'm using to mail a marketing piece to a client it would be general expenses under advertising. If it's a stamp that I'm using to mail a bill, it would be general expenses, this is kind of ridiculous right, you're not gonna track every single stamp that you use in your business, right? So I usually just put a postage category under my general expenses and that's where I put it. So it depends what you need information about. You could get so nit picky and crazy on this that you would spend all your time doing accounting and have no time for your photography. We do have a question.
Just with the payroll for employee, you mentioned that went into cost of sale, because it was going towards frame.
Would that not go into general expenses for an employee?
I think that's a really good question, I'm so glad you asked that. So there are different kinds of employees in a business. And what it comes down to is how you wanna track it and the information that you need for your business. If I have an employee that strictly works on client orders, so they're a framer, a packager, they are an album designer, that's all they do is client work, I would probably put that under my cost of sale because I couldn't produce my product without them. If that employee did everything in my studio from sales to cleaning to framing to everything in between, I would have that as a general expense under employee, and I would track it that way. So it depends what's most useful for you in your business. Absolutely, great, okay, internet bill is the last one. General expenses, advertising.