Many illustrators are unaware of what it will cost them to run an illustration business, while others may be aware but are in denial about it. Most illustrators find it akin to a visit to the dentist. However, a business owner, no matter what type of business they are in, must be aware of the hard cold financial facts behind their business operation. For those illustrators who want to borrow money to start a business, a financial forecast is a necessity, and will be required by a lender for a business loan.
|© 2013 Don Arday.|
Whether it is referred to as a business financial model, a cost-of-doing-business (CODB) analysis, a pro forma financial calculation, or a break-even expense assessment, a financial evaluation will be required by a lender for a business loan. And even more importantly, it must be known by the illustrator to be able to calculate what to charge for, excuse the pun, services rendered. For illustrators who intend to make a living, support a family, etc., knowing
what it costs to run a business is essential.
Those new to business planning are often surprised by costs they never thought to take into consideration. This is sometimes referred to as “hidden costs”, but that is really a misnomer, for a well thought out, comprehensive, business financial model has no hidden costs.
A thorough financial assessment has three parts: 1) Operating Expenses; 2) Income Stream; and 3) Earnings Projection. This article will focus on the operating expenses, which for illustrator’s who generally work alone, will not only include obvious overhead expenses, but also the less obvious personally requisite ones.
Operating Expense Categories
Illustrators rent studio space in commercial buildings, or may operate their businesses out of an in-home studio or office space. For commercial rental space the yearly cost is based on the entire sum of the lease agreement. So, if rent is $1000 per month, than the total yearly rental cost is $12,000. If operating a business in the home, the cost is based on the lease cost or mortgage divided by the percentage of space used by the business. If the mortgage is $1500 per month, and the business/studio takes up 33% of the square footage of the home, than the monthly rent is $500, or $6000 per year.
Electrical, water, and waste disposal are all utilities with fees that should be considered for an accurate financial assessment, and depending on the needs of the business and the business location, utilities can have an impact on total yearly expenses outlay.
Similar to rent, if a phone or phones are used exclusively for business than the cost is equal to 100% of the phones and service plans. For example, a cell phone costing $210 including tax with a service plan of $60 per month, which includes taxes and fees, would be a yearly cost of $930. If a portion of a phone line is used for business it can be prorated for the percentage of usage, so if the usage of the above phone and plan was 25% than the yearly cost would be $232.50.
Internet costs include the basic subscription to an internet service provider, but may also include fees for a cloud storage or database services, and fees for other online services and subscriptions provided for business needs.
Everything created for purposes of advertising or promoting a business must be included in a financial analysis. This would include the cost for printed materials such as stationery, any advertising placements, any form of paid online presence, such as a website, etc. This can also include fees paid to designers for any services they provided for promotion. One time fees and monthly arrangements should be combined to determine the total cost of promotion for the business.
In the old days equipment for an illustrator meant things like easels, drawing tables, chairs, bookcases, flat files, art-o-graphs, copiers, etc. Today equipment not only includes the latter, but computers, digital tablets, scanners, printers, hard drives, and much more. The cost of which can be substantial. Equipment in general can be described as hard assets.
Supplies are a bit more difficult to estimate on a yearly basis because they are often dependent on the volume of work and a specific type of project that will be produced by an illustration studio. Some financial assessments separate office/business supplies from certain art/material supplies. Essentially, business supplies are defined as consumable items, i.e., those that support doing business like staples, paper clips, copier paper, etc.
The other type of consumables are those that are purchased for resale, such as specialized prints, art materials such as paints, pencils, etc. As an operating expense both business and resale expenses are considered equal, but for a loan application and even tax reporting they have a separate status. Here is an example of a resale consumable. A dimensional illustrator buys Sculpey® modeling clay to produce a figure model that is then purchased by a client. Since it is incorporated into a product that is being sold, the Sculpey® is considered to be purchased for resale.
Dues and subscriptions are a necessary expense of being in business. For an illustrator it may be membership dues for the Society of Illustrators, the American Institute of Graphic Arts, the Society of Illustrators L.A., etc. Publication subscriptions provide information, research, and resources for illustrators. This would include fees for tutorial services such as Lynda.com.
No matter what service is used postage and delivery costs should be accounted for. This includes deliveries both to and from the business if paid for by the business. For example, shipping charges for art supplies ordered from Dick-Blick, fees for mailing promotional postcards, etc.
Transportation can include auto mileage used for business and maintenance of an automobile. It can be based on a percentage, if only a portion of the auto usage is for business, or it can be based on the number of miles driven. The cost of auto insurance should be factored in as well. For those who use public transportation, like in New York City, the cost would be subway, bus, and train fares occurred in the course of conducting business. Airline travel can also be considered a business transportation expense if it is not reimbursed by a client or organization.
Cost Per Mile
The Internal Revenue Service issues a standard cost per mile for businesses. The 2014 rates are as follows: 56 cents per mile for business miles driven; 23.5 cents per mile driven for medical or moving purposes; and 14 cents per mile driven in service of charitable organizations.
The cost for services provided by a professional would include legal services, licensing fees, the services of a business accountant or tax preparer, a computer systems or web consultant, etc.
Research costs are expenses associated with research for an illustration assignment. This could be in the form of many different things such as books and other materials needed for visual or informational reference. It could be admission to a zoo or museum, etc.
Health insurance provided by the business is considered personal insurance, which includes life insurance plans, disability plans, and also health and dental plans.
Liability insurance can include insurance protection covering accidents or mishaps that occur on the business premises, or off premises while performing work for the business, as well as protection from theft, loss or damage to business property.
Payroll means the amount of salary and benefits that are paid out to the employees of a business whether they are full-time, part-time, contracted labor, or temporary. And, depending on the size and scope of the business, payroll can be very simple if for a freelance illustrator who intends to work solo, or more complex as in the case of a 10-employee studio.
Operating Expenses Worksheet