After the idealism of youth, and the dewy eyed enthusiasm of the passionate beginner has worn off, and we have begun our fledgling careers in the Special Effects Makeup Industry, most people come to realise very abruptly, and not altogether pleasantly, that there is a long hard road ahead of them, and it isn’t going to be all roses and red carpets…. In short, you will have bills to pay, rent to cover, and you will look wistfully at your friends who have ‘boring’ jobs working in the local bank or as a plumber, who are buying new clothes every six weeks and jetting off overseas for their annual leave, and say “Why cant I afford to do that?” You will have discovered the harsh reality.
It’s hard to make a living wage doing what we do.
And nobody, but nobody, teaches you about Business 101 when you are studying to be an “artist”. Lets face it, you wouldn’t have been interested if they wanted to- you thought that because you loved it so much, all you had to do was get out there, show the world how talented and enthusiastic you were and they would beat a path to your door… FX Houses all over the world would be competing to get you to come work for them, right? Or not….
So, if you have read any of the other documents on this site, we have established that in this business, it is unlikely, in the extreme, that you will be working fulltime for someone else, with holiday pay and sick-leave and workers compensation insurance and regular weekly hours. Even the big FX houses usually hire people on a project-by-project basis, whether that project lasts two months or two years.
You are in essence, a freelancer most of the time, running your own small business, so the sooner you understand that the better off you will be, and so will your bank balance. You need a realistic understanding of the cost of being in business, and that varies. Factors to consider are – You might be working from your spare bedroom and be able to produce the work with minimal overheads. Someone else may have a big workshop and staff and any quote needs to consider these costs so they are probably guaranteed to be more expensive than you. It is not unusual for beginners and even, sadly, some experienced artists, to undercut other people in a desperate attempt to get more work, but all that really happens is that everyone knows how little you were prepared to work for last time so why should they pay you more now?
Other factors to consider are the amount of money they have to spend in the first place and the credibility of both yourself and the production company. A producer is also going to take in to consideration track record. On price alone you could get the job, but the producer also wants to be sure this will work (it’s on a well known actor for example) so he’s not going to take risks.
Occasionally you will be working for someone else as a freelance technician and usually the rate is set for you by the employer. They have price brackets for crew and either you fit the bracket or you don’t. As a freelancer you can ask for any amount you like as that’s your business. Whether anyone will pay it to you is another question…
Sometimes you are hired as an Employee of the production company for a set period. At times you will be engaged as a Subcontractor – one business hiring another business to undertake a certain task.
The laws relating to when you can be defined as an employee and when you are a subcontractor are vastly different from country to country- check with your own state or federal government authority!
Your income as an employee or sub-contractor on some projects might seem generous, but the reason minimum mandated pay rates on professional and funded projects can be higher than basic wage is that you have to make it last! There is no job security, no healthcare plan, and no guarantee of future work. If you are realistically only going to have work for six months of the year, better not blow it all at once- you need to get through the times between films without any income, or turn your hand to another job to cover yourself.
So, now you are out in the real world, you have done your fair share of freebies to get experience and build your contacts and portfolio, and finally, someone comes to you and asks you to do an estimate for the FX in their small, independently funded project. Great! You think, ‘real’ work… and then you realise you have no idea where to start. How do you cost a job? How do you know what your time and experience is worth? How much do other people charge? As has been said, this is a “How long is a piece of string” type of question. Your circumstances and thus your overheads will be different from everyone else’s, and frankly what they charge is none of your business anyway, as long as someone is willing to pay it. You can’t compare yourself to a veteran with a full workshop and employees and decades of experience and expect to get the same price for your work.
ACCOUNTING 101 for SFX MUA:
IMPORTANT NOTE: Financial terms will have slightly different interpretations in different countries. An understanding of basic accounting terminology is necessary to make informed business or investing decisions. So as a general rule for all non-financial business people, if in doubt, ask for an explanation from your accountant or business banker. And you WILL need to get an accountant eventually…. 🙂
Take a deep breath and maybe make some notes…
The top and bottom lines of an income statement are often confused:
REVENUE vs INCOME
When reviewing a financial statement, revenue and income are terms that seem similar but very different meanings. Revenue equates to the total amount generated, while income is what is left after expenses. Not being aware of the terms used can lead to mistaken conclusions.
Definition of Revenue
The top line on an income statement is the total money you have coming in, sometimes referred to as Turnover, or Total Sales. It is what you charge someone else for your work or goods and is the total amount of sales that a company has for the period covered by the statement. (For retail it is Sales Price of product x Quantity sold, less discounts.) This amount may stand alone, or may be reduced by sales returns and allowances.
When calculating revenue remember that for accounting purposes, money is counted in the period it was received- NOT the period in which the expense for product production was incurred, and it can often take someone up to three months to pay you on your invoice.
*It is important to know how much money is being generated from sales, but it is only half the picture. The next step is to know how much goes out, and how much is left.
Definition of Net Income
In accounting terms, income is the amount left after expenses have been subtracted from revenue. If expenses are greater than revenue, a business is said to have a net loss. Net income is another way of saying profit, or gain. This is the ‘bottom line’.
(*Business Income is not to be confused with personal income.)
- If a company sells $10,000 worth of items in a month, and the cost for those items is $8,000, net income is $2,000.
- If revenue is $10,000, and total expenses are $13,000, there is a net loss of $3,000.
Expenses include expected items such as salaries, supplies and rent, but also depreciation and bad debts. Depreciation is the amount of large expenses such as buildings and equipment like machinery and vehicles, (known as capital items) which is spread over several years, based on the expected lifespan of the item. If you will use a machine for ten years before you replace it, then you spread the cost over that expected timeframe to work out its real value to you.
Cash-Flow in Business
Another easily misunderstood term is cash-flow. The term generally means revenue less all expenses except depreciation. Depreciation is a non-cash expense; therefore it is added back to income to calculate how much real cash is being generated by the business.
Capital items impact cash-flow only in the year that they are purchased. It is vital for a business to generate enough cash flow to replace capital items when they wear out.
*Cash-flow is the real killer. It doesn’t matter how much money you are going to make, on paper, from a particular job, if you don’t have enough money in the bank to be able to buy the materials you need to do it, or enough money set aside to live on while you are working on it. Poor understanding of cash-flow kills more businesses than anything else- no matter how big or successful they appear.
*Revenue versus Income in Business
Often in business, someone may make seemingly outrageous claims, such as generating hundreds of thousands of dollars in revenue. The claim may actually be true, but misleading to those that do not understand the terms. There may be $200,000 in sales, but if expenses are $250,000, the person is really generating a loss. The income, may be small or negative. They are not taking the money home, but actually are putting more into the business than they are taking out. The information is factually accurate, but can be misleading without a good understanding of accounting terminology.
The first question most beginners ask is how much should I charge?
Well, that’s going to require you to do some homework first. With a bit of homework and some effort you can figure out the actual REAL COST of doing a particular job. But in order to grow and develop your business you will need to make more money than what it is costing you. A profit margin of 10% – 25% above the cost of the job is probably a good start. I’m not talking about paying yourself a higher wage, although if that’s what you want go ahead. But if you want to have any security for the future, or invest in better plant and equipment, or rent a bigger workshop, or even your first workshop!, then you need to have what we called Retained Earnings- money you leave in the business for just that purpose.
As a self-employed freelancer or small business owner/operator, how do you work out how much you are worth and should get paid? Simple, you factor in the cost of making the piece or doing the actual job, subtract that from how much the client is willing to pay you, and whatever’s left is divided by how long it takes you! In the early part of your career it ain’t going to be a whole lot, but as your experience and reputation grows people will value you more highly and be willing to pay more. You will start by doing jobs simply for the cost of materials, and then graduate to a flat daily rate of whatever the production can afford, and then you can start working out the minimum amount you are prepared to work for!
I am not going to attempt to list average hourly rates because they are meaningless out of context, and they will be totally different dependant on the currency you are paid in, the country you live in, and the level you are at in the industry.
Once you are regularly getting work in the professional arena, most countries have some sort of formal Govt Agreement or Award that lays down minimum employment standards and conditions, below which no employer is allowed to go.
Many also have an agreement pertaining specifically to the Film Industry. Do a bit of homework in your own country to see what if any conditions and minimum rates apply to your position.
In most countries there are Unions that represent the interests of members of such industries, and for some of you it may be worth investigating that avenue. Bear in mind that membership of some Unions requires proof of professional employment (usually at the very minimum an employment contract or your name on a callsheet from an actual production company- and student films don’t count!) Some require you to pass an exam, and ALL require you to pay annual fees.
Statement of Income:
We will now go through the classic Business Statement of Income, (see diagram ) or in some countries Statement of Profit and Loss, step by step. Terminology can vary a bit from country to country but there are certain standards that remain the same. This is NOT a statement covering your Personal Tax and Tax Deductions!!
Statement of Income — Example
(figures in thousands)
Sales Revenue $20,438
Cost of goods sold $7,943
Gross Profit $12,495
Selling, general and administrative expenses $8,172
Depreciation and Amortization $960
Other expenses $138
Total operating expenses $17,213
Operating income $3,225
Non-operating income $130
Earnings before Interest and Taxes (EBIT) $3,355
Net interest expense/income $145
Earnings before income taxes $3,210
Taxes payable by the business $1,027
Net Income (Net Profit) $2,183
Deciphering a Statement of Income (Profit and Loss):
1. Revenue – Cost of Goods Sold = Gross Profit
a) Included in Cost of Goods Sold is the actual amount of material you used. Commonly arrived at via the formula: opening stock + stock purchased – closing stock.
b) The Cost of Goods produced in the business should include all Costs of Production. The key components of cost generally include:
▪ Parts, raw materials and supplies used, (MAIN materials (not “consumable supplies” like cups, tape, etc. they go in your expenses list)
▪ Overhead of the business allocable to production These include Special Expenses- say if you had to rent a spraybooth, or a special chair, or hire someone else to bake your foam, etc. and things like Travel Expenses, this is all hotel, car rental, food while away on business, airplane tickets, etc.
So you have made a severed head for someone. The cost of that head is how much it cost in materials, the labour costs (how long it took you to make it x your hourly rate), plus any special costs directly related to making it, eg any special equipment hire, maybe a travel + lodging fee, because you had to go life-cast your actor in another city….
2. Gross Profit – Operating Expenses = Operating Income (Operating Profit)
Included in the Expenses will be all Overheads (the cost of running your business) like phone, internet, electricity, rental for your workspace, insurance, consumables like cleaning products and disposable items used in production.
A typical Expenses list might look like this:
- Cleaning Amenities
- Cleaning services
- Courier charges
- Council Rates
- Bank Charges
- Hire Equipment
- Shop Fittings and Equipment
- Land Tax
- Motor Vehicle Expenses
- Office Rent
- Office Equipment and Software
- Product Handling Items
- Consumables & Hygiene
- Personal Protection Equipment
- Printing and Stationary
- Repairs and Maintenance
- Rubbish Removal
- Staff Amenities
- Salaries (for people not involved in Production)
- Variable Outgoings
- Water Rates
- Electricity and Gas
- License and Registration Fees
- Professional Memberships, Union Fees etc
- Education and Professional Development
Even if you are working from your home, if you are registered as a small business you can usually claim a certain percentage of your rent and electricity/phone bills for Home Office costs as a Tax Deduction….
3. Earnings Before Interest and Taxes (EBIT)
Operating profit + Non-operating Income = Earnings before interest and taxes
4. Earnings Before Taxes
Operating profit – one off items and redundancy payments, staff restructuring – interest payable = Earnings Before Taxes (Pretax Profit)
Not so important for smaller and one man operations but relevant for bigger businesses.
5. Net Income (Net Profit)
EBT – Taxes Payable by the Business = Net Profit
*Not to be confused with Taxes payable on your personal income….
6. Retained Earnings
Net Profit – Dividends = Retained Earnings
Retained earnings refers to the portion of net income which is retained by the business rather than distributed to its owners as Dividends. Retained earnings is the money available to you at the end of the year, if you have done well, that will allow you to grow your business and invest in capital purchases without borrowing.
Similarly, if the business takes a loss, then that loss is retained and called variously retained losses, accumulated losses or accumulated deficit. Retained earnings and losses are cumulative from year to year with losses offsetting earnings.
Dividends are payments made to owners, and constitute a taxable part of their non-salaried income. In many cases when businesses are in the establishment phase, owners choose not to pay themselves a wage at all, instead taking a smaller amount as dividends.
Which brings us to the subject of Taxes. Everyone’s favourite! Do not forget that if you earn income, you will need to add that to your total income for the year and pay tax on it!!!! Important fact: Dependant on your total income from this and other sources, some countries have a threshold of earnings for any particular activity, below which you are not counted as a professional, but as a hobbyist. Once you get over that income threshold from a particular activity your tax rate changes. Below that threshold you may also not claim deductions, above it you can.
Do you need to factor in VAT, (Value Added Tax), Sales Tax, or GST (Goods and Services Tax) for your particular country? If you have charged these costs to your clients, then the Net Profit figure is going to include that revenue, which, of course, you then have to forward on to the Government. So in calculating your Retained Earnings, it is usually done AFTER you calculate all of your other costs.
If you are registered to claim you may be able to get a rebate back from your govt authority, as a manufacturer. In some countries where a Goods and Services Tax is charged, you only need register for GST if your turnover is over a certain amount or if most of your clients are registered for GST.
CHECK THE LAW REGARDING TAXES IN YOUR COUNTRY OF RESIDENCE!!!
IGNORANCE OF THE LAW IS NO EXCUSE!!!
I hope you don’t have a total headache if you made it this far. I empathise- Math isn’t my favourite subject either, but it is necessary to understand all of this if you want to have any longevity in this or any other small business- EVEN if you have an accountant doing the bulk of it, you need to understand what the figures mean and be able to spot a problem before it turns into a disaster. I wish you luck, and a healthy profit!