With a new year upon us, there’s no better time to reset the way you keep track of your photography business finances. There’s nothing romantic or warm and fuzzy here, just solid advice for how to keep track of your photography business finances.
Even if you’re an established business with a few years under your belt, there’s something here for you, too. I’m four years into my business, and I wish I had read an article like this when I was just starting out. In fact, I would’ve loved this article a year ago!
Before I continue, much credit goes to the Building a Story Brand Podcast and their episode with Mike Michalowicz. I listened to this episode of the podcast in October, and it has completely changed the way I keep track of the finances for my business.
How I Used To Do Things
Until I listened to the episode mentioned above, I had been keeping track of finances and paying myself in the exact way the Mike Michalowicz argues against. For every job that came in, I took out 30% for taxes, then subtracted all expenses, and whatever was left was split between personal income and business investment.
For example, let’s say I did a session for $500 and included an album that costs $160 out-of-pocket. With the method above, that would mean $150 saved for taxes, $160 out for the album, and another $37.50 for my sales tax. That leaves me with $152.50 to split between my income and my business growth. An even split would pay me just under $77 in income for that job.
Why is this wrong? For one, it puts me, the business owner, last. More importantly, by simply splitting the leftovers, I don’t get a real sense of whether or not my pricing works for me and my business.
What I Do Now
Let’s do the same math putting my income first. I’ve decided that I want to get paid 30% of every job. That means I get paid $150 right away for that job--twice the amount of my previous method! But the real knowledge comes next: after my income ($150), taxes ($150), and sales tax ($37.50), that only leaves $162.50 for the cost of the album and for my business growth, which means that after the $160 album-cost-out-of-pocket, my business only gets $2.50 from that sale.
What am I going to do with $2.50? What business expense will that pay for? Two business cards?
What I really get for $2.50 is the knowledge that I am pricing my business all wrong. That’s what a good financial system will give you, a true picture of your business. And above all, you’ll quickly learn how to price yourself to make good money.
Profit Versus Income
One more thing I haven’t mentioned: there’s a difference between profit and income. According to Mr. Michalowicz, income is money you use to pay bills and profit is money you use to reward yourself for having a business. You have to do something fun with profit.
Okay, so here’s my system right now. For every job, I allocate the following in this order:
2% for profit
30% for income
30% for taxes
38% for expenses and business growth
(I’m just beginning this whole “profit first” system, which is why my percentage for profit is so low. As Mr. Michalowicz suggests, start small and see how it works for your current business.)
The real key to this system is to track your finances in the order listed above: profit first, income next, taxes after that, and all business expenses and growth last. You have created a business to make money--you should get paid first, not last!
I’ve been tracking things this way since early October, and it’s helped me realize that proper pricing is the difference between a business that can grow and a business that’s not sustainable.
The good part about this system is that I always get paid, which didn’t necessarily happen before. The bad part is that I quickly realize which jobs are priced incorrectly. Tracking finances this way allows you to see which jobs have money left to invest and which jobs cost more than you made.
How This System Gives You Knowledge
Here’s what I mean when I say that this system can help your pricing:
I made a custom book for a client. I did a 4x markup on the book, so I charged $165.55 including $11.55 in sales tax. I then paid myself $3.31 in profit and $49.67 in income. I put aside $49.67 for income tax. That left $62.91 for the cost of goods and business investment.
Here’s where the problem begins: I made a mistake in my estimated cost for the album. Long story short, the book cost me about $10 more than I anticipated. Add to that the $5.10 in PayPal fees, and I was left with -$1.44 for my business.
That’s right: instead of having money left to invest in, say, my website or studio samples, I actually cost my business money. To pay for that album, I need to pull $1.44 from another job.
That means I priced that book incorrectly. A 5x markup would have at least accounted for the error I made. And a 6x markup would’ve left money for my business.
For anyone out there who thinks a 6x markup is unreasonable, think about your profit, your income, and your business growth. That’s when a 6x markup becomes a necessity rather than an option.
Let’s look at one more example:
I had a family order six prints ranging from 4x6s to 8x10s. I charged between $30 and $40 for each print, depending on size. Here are the numbers for a print sale:
Total Sale: $215
Set aside for taxes: $64.50
Left for expenses and growth: $81.70
Cost of goods: $30.85
Sales tax collected: $15.00
PayPal fee: $6.54
Total left for business after all expenses: $29.31
Woohoo! I have almost $30 to invest back in my business! That could be a new memory card, a set of business cards, a portion of my Pixieset subscription, you name it.
How You Win With This System
By pricing myself right and by tracking my finances with profit and income first, I do three things:
1. I guarantee that I get paid
2. I give myself a little reward for owning a business
3. I learn whether or not my business is sustainable
When it comes to #2, for the 4th quarter, I’ll have about $185 in profit. That’s a nice date out for me and my wife, something we rarely do since things are run pretty tightly as a one-parent-income family with three kids. That $185 will pay for a babysitter and a nice meal, something I think we deserve at the end of the year.
After implementing this “Profit First” financial system, I have so much more confidence in my pricing and my business. I also just feel better about all of the energy that I put into my side-job (yep, I also teach high school full-time). I love that I get paid first, and I’m excited to reward myself with my first 4th-quarter profit.
Scroll back up and look at the “profit first” percentage allocations. Ask yourself, “Is this how I track the money in my business?” If you don’t put profit and income first, then it’s time to change. Make 2019 the year that you put your profit first.
Aaron Taylor is a professional portrait photographer and high school English teacher. Aaron is forever blessed to be in love and married to his best friend and partner in parenthood. Much of his time is spent chasing his three curious, energetic kids. Aaron lives in Columbus, Ohio. Before moving to Columbus in the summer of 2016, Aaron was a high school English and Drama teacher in Montgomery County, Maryland. He spent ten years in the classroom in Maryland and earned National Board Certification in English Language Arts. Give him his family, a good cup of coffee, and a homemade cookie or three, and all is right in Aaron’s world.