Why Freelancers Need to Know Their Cost of Doing Business

Why Freelancers Need to Know Their Cost of Doing Business

Unless you’re phenomenally wealthy, you probably maintain a budget for your finances. For freelancers, budgeting (and cash flow management) is crucial because the lack of steady income and hefty capital requirements (e.g. a new camera) can require a bigger financial cushion.

During a PhotoShelter Third Thursday event, I queried the audience about whether they had used a Cost of Doing Business (CODB) calculator. A participant answered:

“I did it once, and I don’t know what the hell you guys are talking about. I just found that it was totally unrealistic. I added it up, and I still was like, ‘Where did this number even come from?’”

It’s true that the first time you calculate your CODB, the result can be shocking. Many people find that they’ve severely underestimated what it costs for them to run a business (or they don’t have an accurate accounting of their expenses).

1990s supermodel Linda Evangelista infamously stated, “[Christy Turlington and I] don’t wake up for less than $10,000 a day.” People were shocked at her hubris, but Evangelista knew what she was worth. Why take a low paying job when she could maintain a high quality of life with fewer work days at her known value?

pizza making and your cost of doing business copyright Allen Murabayashi

Photo by Allen Murabayashi

What is CODB?

CODB is the total of your annual expenses + your target pre-tax profit (aka salary) divided by the number of billable days you work in a year.

Most people have a sense of their monthly expenses, but a much smaller number have considered what profit they want to make. And some freelancers have no idea how many billable days they work.

Here’s a simple example:
Expenses: $30,000
Salary: $50,000
Billable Days: 150
CODB: $533

A few things to note:

  • Salary is pre-tax
  • Full-time employees don’t incur business expenses on nearly the same scale, so making $50k as a freelancer is not the same as making $50k as a full-time employee (which might also provide benefits like subsidized health insurance and a retirement plan)
  • These are business expenses, not personal expenses. You should obviously track your personal expenses (mortgage, education, discretionary income, etc) to help you determine a desired salary.
  • We encourage you to use a conservative number for your billable days. You’ll need to save some of your work days for administrative, marketing, meetings and other non-revenue generating tasks.

A Single Source of Revenue

When you’re dealing with a single source of revenue, calculating your CODB might seem superfluous. A wedding photographer who charges $2000 per event and wants to gross $80,000 needs to shoot 40 weddings per year. Similarly an editorial photographer whose clients pay $200 per assignment needs 400 assignments.

It’s worth pointing out that both of these targets (40 weddings or 400 assignments) are near impossible. You might also be saying that you don’t need to make $80k, but people often underestimate their expenses when pulling a desired salary out of thin air. Again, if you’re a freelancer, you’re going to incur many more expenses than a full-time employee.

Secondly, this approach treats the revenue generating event (e.g. $2000/wedding) as a fixed input rather than a lever that should be tweaked. Photographers sometimes tell me that their market won’t bear higher fees, but if you can’t exceed your CODB, you’ll go out of business!

pizza making and your cost of doing business copyright Allen Murabayashi

Photo by Allen Murabayashi

No really, you need to know your CODB

One could argue that staying “in the black” is sufficient for financial planning, but this approach doesn’t provide enough granularity to make smart business decisions. For example, if you manage your finances by simply balancing a mix of income sources (e.g. editorial, workshops, wedding photography) against expenses, you can’t determine which activities yield the best return on investment, and which activities actually cost you money.

Day rates for editorial photography, for example, usually fall under many people’s CODB. But photographers sometimes take editorial assignments because it exposes their work to photo editors and/or it gives them creative freedom that they might not get in a commercial setting. Shooting editorial isn’t inherently bad, but you need to understand the economics behind it to make solid business decisions.

You are not scalable

It’s tempting to believe that we can simply work more to make up any financial shortfall. But we cannot control the influx of clients, and you can only work so many hours in a week before you burn yourself out. Unlike a website, you can’t replicate yourself, so maximizing your ROI (return on investment) of time is critical.

pizza making and your cost of doing business copyright Allen Murabayashi

Photo by Allen Murabayashi

What the market will bear

Once you’ve calculated your CODB, you can use it to inform your rates. CODB is rarely used directly as a “day rate” because photographers often perform a variety of activities (e.g. commercial, editorial and teaching usually have different billable rates) and matching your CODB doesn’t give you any cushion.

Here’s where the disconnect often comes in. Photographers are surprised to find that their CODB is higher than their existing rates. Maybe you’ve been charging $300 for a senior portrait only to discover that your CODB is $450, and there’s no way students in your town are going to accept a 50% price increase – especially because the competition is also at $300.

First, let’s remember that CODB is an average. A few higher priced shoot days can offset lower days. But if you’re strictly doing $300 jobs, then you’ll need to increase the number of billable days, or the number of jobs you do in a day. In the case of the senior portrait photographer, you might offer a discount if the student brings in a friend with them. $300 suddenly doubles (minus the discount), and you’ve exceeded your CODB. A little business creativity can go a long way.

pizza making and your cost of doing business copyright Allen Murabayashi

Photo by Allen Murabayashi

When your client dictates rates

Editorial photographers, in particular, have a habit of accepting the rates dictated by their clients instead of asking themselves whether the rate is sustainable. Granted it’s near impossible to negotiate a newspaper or magazine rate (although some photographers bill expenses like equipment fees), but photographers could benefit from understanding how they should split their time between high and low paying jobs so that their average income per hour puts them on solid financial ground. In rare instances, photographers have and should work in concert to negotiate better rates for everyone.

The bottom line: Using a CODB calculator should be part of your annual planning, and should inform potential rate increases and/or the mix of your photographic activities.

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This article was written by

Allen Murabayashi is the Chairman and co-founder of PhotoShelter. He co-hosts the "I Love Photography" podcast on iTunes.

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