One of the most useful things you can do before you start your own business is get a feel for finance. The first exercise you should do is to keep a record of how much you spend over a couple of weeks/months (include everything possible – regular costs such as food and rent, plus irregularities such as someone’s birthday piss-up). From this you should be able to work out with a degree of accuracy how much money you spend every month, this figure (plus at least 10% contingency) is your basic break-even, that is the amount of money that needs to come in to prevent you sliding into debt.
Although this seems very basic, it’s staggering how many people are ignorant of how much they need to live on, and is one of the key causes of bankruptcy. This figure will of course change over time, and it’s important to keep an eye on creeping costs, and changes in the cost of living. It’s stating the obvious that your living costs will escalate dramatically if you move from a small town in the UK to London, or even Manchester, and you need to reflect this in your break even. For example, the average rent of a flat, or room in a shared house in Blackpool (where I studied) is currently around £50 per week. Contrast this with London, where it’s more like £100, and you’ll see that in one easy move you can double one of your largest costs of living.
Your break even is a purely personal figure, and no bank or accountant are going to be particularly interested in it, however, as an aid to keeping you afloat, its importance is paramount. If you have no idea how much money you need to make to stay alive, pay the rent etc, the first indication that you’re in trouble will usually be a red bill through the door, or the phone being cut off (or worse). If you have a notion of how much should be coming in, you can be better prepared when things go quiet, as they inevitably will from time to time.
Once you’ve arrived at this magical figure, your next job is to forget it, or at least, put it at the back of your mind. I shan’t wax lyrical about the “power of positive thinking” and suchlike, but I can speak from experience when I say that getting fixated on your break even can reduce your potential income quite dramatically. What I’m getting at is that if you become stuck on a figure which is the bare minimum you need to survive, it’s highly likely that’s all you’ll make each month. I can’t provide scientific evidence of this other than my own experience, but a far better option is to consider your break even, then add a healthy percentage on top, as keeping this in mind will almost certainly bring in a higher revenue.
Your Money and the Business’ Money.
It is important at this stage to recognise the difference between what is classed as “turnover” in a business, and the money that you are actually able to pay yourself to stay alive. Put simply, turnover (sometimes referred to as “sales”) is the total amount of any invoices you issue over any given period, be it weekly, monthly or annually. This amount will include a certain amount of expenses, which are obviously owed to other people. Turnover is significantly different to your “owner’s drawings” which are monies that you pay yourself out of surplus business funds, after all your business costs have been met. It’s these owner’s drawings which you can then use to pay your rent, buy sweets (but only if you’ve been good), and feed and clothe yourself with.
Another vital principle to understand about turnover is the portion of which will be expenses, and is therefore owed to someone else. Allow me to give you an example (kept deliberately simple for the purposes of this piece – no VAT or anything like that!):
Early on in your career you’re given a small editorial commission for which you will receive £300 fees, plus the “allowed” expenses. You have to travel from London to Glasgow by train for it, with an assistant, and stay overnight. So let’s say that the client allows you to invoice them for 2 days worth of fees (£600), plus 2 days of assisting fees (£160), the 2 train tickets come to another £160, the hotel is £110 for the 2 of you, and food consumed on your little trip came to £55. So, The total invoice comes to £1085. For a couple of day’s work that looks like a very healthy figure. It is vital that you realise 2 things at this stage; firstly that even if you invoice the client straight away you probably won’t see the money for a month, sometimes two, therefore don’t go out and start spending it before it has arrived. Secondly out of that £1085, nearly £485 is expenses that you will have to pay for, and you’ll almost certainly have to pay for them before the cheque for the invoice turns up.
Some of those expenses can be on credit; labs and hire companies for example will usually give you a month, some can be put on a credit card, and some will have to be paid on the spot (usually any petty cash purchases, or deposits for things you make whilst on the shoot). If your business is to last more than 10 minutes it is vital that you settle your expenses before you start paying yourself an exorbitant wage. The £1085 is not yours to spend exactly how you choose, and whilst a new pair of jeans is very tempting, not buying them only means you will be unfashionable for another couple of months, whereas not paying your suppliers usually entails ending up in court, or facing bankruptcy proceedings.
And therein lies one of the simplest and most fundamental rules of being self-employed:
Don’t spend the money until you’ve got it and then paid everyone else!
It’s also vital to get clear in your mind the difference between the figure of turnover, and the amount of money you have available to yourself as a person or to invest in the business. As a guide, in my first year in business as an assistant/photographer in London my turnover was £8169. How I lived on that is still a mystery. Of this £3333 was expenses, leaving me with £4836 to either pay myself or invest in future business activities. By comparison in my second year turnover was £14,751, with £6525 expenses leaving me £8226. In percentage terms turnover has increased by 80%, expenses by a whopping 95% but profit by only 70%, so don’t be distracted by a large turnover figure, as it will rarely match the money in your pocket.
At various times of the year the financial picture can look very rosy indeed, with lots of invoices on the books and a very healthy turnover figure. However, a significant amount of this will be expenses, and even more importantly, a large portion may be outstanding and not due to be paid for another month or six weeks. And don’t forget to allow for tax, as well as expenses that often crop up annually such as insurance! As a guide, at this precise moment in time (28/11/7) I’m owed over £6000, down from 8 a couple of weeks ago. Most of this is from jobs in the past 2 months.