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How to Make a Profit in Video Production
131 Plays4 years ago
Max and Jake break down the importance of making a profit, what you can do with the profit, and how to insure that you make the profit you need.
- What profit is?
- Why profit is crucial to growth?
- The "No Profit" Trap People Fall Into
- How Much Profit Do You Need?
- How To Calculate Your Profit Into Your Job Budgets?
- "Bottom up" example from Jake
- How to apply profit metrics to each and every job
- Profit and sales people incentives
- Keeping tabs on profit throughout the year
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Transcript
Introduction to Max Keiser and Pipeline
00:00:04
Speaker
All right, and we are back with Crossing the Access, the biz side of video production with myself, Max Keiser, the CEO and founder of Pipeline, the software that helps you get your video production company organized and profitable. And with me also is my right-hand man and partner, Jake Warda.
00:00:28
Speaker
Hey, I'm Jake. I do customer success and operations over at Pipeline.
The Importance of Profit in Business
00:00:35
Speaker
Jake and I are here to talk to you today about something that we love and that is profit.
00:00:43
Speaker
And you really, you don't have a business without one. You're just, you have a hobby if you don't have profit. And profit is so crucial because it's what you, so first of all, profit is what's left over after you've paid everybody else, you've paid for everything and it's even after you've paid yourself. So that's an important distinction. When we're talking about, yeah, when we talk about profit, you're either, you're paying yourself
00:01:12
Speaker
or you're factoring what's left over after you're accounting for your time. Absolutely. And profit is not people immediately, oh, it's like bad company, Mr. Burns back there counting his money. No, profit is just an operational value that you need.
00:01:30
Speaker
in order to be able to do anything other than spin your company. One of the things with crossing the axis that we're continually trying to do is tell you how to get out of the ruts that you are in, out of the ruts with the types of clients, the types of work, but also out of the ruts with your revenue streams.
00:01:48
Speaker
Profit is the magic bullet to get forward because of the great things you can do when you have some profit. It's crucial because it enables you to invest back into the company.
00:02:06
Speaker
things like your gear, things like doing spec work. Max, you've talked about that before and how important that is. You can take a couple days off and still have some money. You can also repay the gear that you've already purchased. So that's not an expense on your income statement. So it's important to distinct that buying new gear and
00:02:35
Speaker
paying for financing on gear are things that we consider after profit. So you got to make your profit and then you can do those things. Yep. And we know how crucial things like having the right gear for your shoot is. So obviously those are very critical things.
00:02:55
Speaker
And also the ability to do spec work, which is, in my opinion, often when you grow the company creatively is when you can actually go out and make some spec work to attract the type of client that you're trying to move into and we can, we really need to do a podcast just about spec work, Jake.
00:03:11
Speaker
These things are critical and then also a cash reserve at the end of the day for our business like it or not is extremely volatile.
Investment and Growth Through Profit
00:03:20
Speaker
The vicissitudes of making money and not making money no matter how hard you work to even out your sales pipeline. Let's face it, things like a pandemic come along and can really throw you off your game. So having a cash reserve that comes via profit can be really critical.
00:03:39
Speaker
Or even just to fund those lean months. You have Feast and Famine, we've talked about a little bit in our Season of Sales podcast. Those really hot months where everybody's calling you and you have some of those months where no matter what you do, your phone never rings.
00:03:56
Speaker
And the thing is, it's just absolutely amazing how often a company will operate without really keeping profit at the top. And I would say at our old company Handcrank Films, I helmed that company for 15 years. And I would say I did not start thinking seriously about profit until about year 12.
00:04:15
Speaker
when I must have read somewhere or something and a seriousness of not taking profit seriously. And I got that book called Simple Prophets. I'm sorry, what is it called again, Jake? It's by Crabtree. It was by Air Crabtree.
00:04:33
Speaker
Yeah, I couldn't tell you off that offhand what it was called. I'll have to look that up after. Yeah, simple profits, something along those lines. That's right. Small book, big profits, something like this is this little orange book and it is absolutely just a very quick sort of helper book to give you an idea of why this is also important. So it really changed
00:04:53
Speaker
so much about our company when we started taking it seriously and quite honestly made so many things easier when we started taking it seriously. The traps that you can fall into when you don't take profit seriously are, first of all, you're taking all the money off the table all the time. So every time you don't really pay yourself and you're just like, well, I take what's left, you do that and nothing's left for that reinvestment.
00:05:15
Speaker
I think that one right there, if I could talk for just a second about that, that's one that I hear people fall into all the time. They don't pay themselves or they just figure, oh, I'll just take what's left over and they're not really carving out money for themselves.
Setting Profit Goals and Budgeting
00:05:33
Speaker
And what you're doing there is you're really cheating yourself. And that's one of the things that the book talked about. You're cheating yourself.
00:05:44
Speaker
putting yourself at last and you're not properly compensating yourself for all of your work. You know that you work hard. And if you were putting that much work into another company, they would be paying you. So you should be treating yourself the same, if not better.
00:06:00
Speaker
book is called Simple Numbers, Straight Talk, Big Profits. That's what it was. That's what it's called. Had to look that up real quick, but it's a little orange book for about 10 bucks and you'll make a fortune off the backside of it and do much better. The other thing is, is not accounting for profit in all your project budgets. Um, and just generally wind up spinning in the same place and never growing just, just like we've, we've talked about. So hopefully now we've beaten that to death why you need
00:06:25
Speaker
to take profit seriously. We only do that because often no one wants to listen. How much profit do we need, Jake? Well, I think a number, it's easy to calculate, it's easy to remember, and it's a good goal. And that's about 10% of your revenue you should be keeping in profit. Now, when I say, yep, that's pre-tax, pre-depreciation. And like we said earlier, that's before you reinvest in things like gear, but that's just
00:06:55
Speaker
What's left over at the end of the day after you've paid everybody? So if I have a $500,000 company and I'm doing 10% profit, which should I? You should be making 50K in profit. I love that. Yeah, that's right. So yeah, that's a good place to start. Honestly, that's a very healthy, well, I should say that's a very healthy place to be.
00:07:16
Speaker
But that's just a good, you don't get anywhere you don't aim, so that's a good place to be. But what does that mean? How do you calculate this profit? How do you get this profit to actually exist? And the important thing is that you need to include it in every project budget that you do. That's the only way you're going to get there. By doing it within the little projects will add up to a whole year's worth of profit.
00:07:40
Speaker
And that's really how it goes. You're not going to get there at the end of the year by figuring it out. You're going to have to figure out ahead of time what your goals are and how you're going to approach that and figure it into then every single job budget that you do. But it's not as easy as just saying, well, I guess in every job, I just need to have 10% profit. That's not how it works. Definitely not. Nope.
00:08:04
Speaker
And that's because of things like overhead. And overhead being rent, utilities, and fixed labor costs that you may not include in your budgets. You may not be including what it costs to have a car to drive to the chute. You may not be including your own hours in the way you do your numbers. And those all add up into your overhead. And that's why that 10% can be very misleading. And that's why a lot of times I think people think,
00:08:32
Speaker
I don't know. I had 10% in my budget that I got on my Google Drive spreadsheet that I downloaded from some guy's website and I still am not making any money at the end of the year. And that's because you're not looking at the whole picture when you do that planning. And so now Jake's going to take us through sort of
00:08:51
Speaker
a process that pretty simplified because obviously we're on a talk show here and we don't have the paperwork in front of us, but a pretty simplified bottom-up approach to figuring this out so you know what to apply to each job. Exactly. As Max said, you have two different
00:09:07
Speaker
profit numbers. One is your gross profit. That's what you need to be making on every project. That's after you paid for those project specific costs. But then you have a net profit, and that's that 10% number. And that's what you need to be making after you have your gross profit and you subtract overhead. So what I do is I do this bottom up approach where I say, okay, based on that you need to know your
00:09:35
Speaker
goal revenue or what you're typically bringing in in revenue every year. For simple math, say it's 500K a year. You need to know that and you need to know your net profit percent goal. We're going to go with 10%, like we said earlier, easy to calculate, easy to aim for. That means I need to be bringing in 50K and profit every year.
00:09:59
Speaker
I then take that number and I add to it my overhead costs like Max was explaining. Those are your rent, those are your utilities, your car, everything, your salary. Importantly, that's your salary and the other salaries that you're paying that are not part of the project expenses. Let's say I have about $150K a year in overhead expenses.
00:10:23
Speaker
I take my profit, 50K, I add to it my overhead expenses of 150K, and now I know that I need to be making $200,000 a year in gross profit.
Maintaining Profit Margins
00:10:35
Speaker
What does that mean? That means that after
00:10:39
Speaker
my revenue, and then I take my project expenses, which would be the difference between revenue of 500K and my gross profit of 200K is 300K. So that means in my company, if I'm bringing in 500K and I want to hit 50K a year and profit, I can't spend more than 300K a year in project expenses, which comes out to 60%.
00:11:07
Speaker
So what my budget would look like, like, let's say I had a single project budget. What would I want that to look like just on the very top top sheet? Sure. So you'd want your revenue. You'd want to spend no more than 60 percent of that project. It's a $10,000 job.
00:11:26
Speaker
you want to spend $6,000 not to exceed $6,000 in project related costs and you want to make sure that you have 4,000 leftover in gross profit. Right. So let's look at that. So let's say that I don't include my time in, in, in billing, but what I can bill for use that 60% for are the talent. It can be additional gear beyond what I already own that I rent.
00:11:54
Speaker
It can be additional crew that I need. It can be location costs, all that kind of jazz, but you can't go above $6,000. If you're going to hang on to 10% at the end of the year, you've got to have 40% of gross. Every project. Every project. That's kind of a mind-blower for a lot of people because they're just like, what?
00:12:23
Speaker
And that's why I think you see a lot of folks worried about when they see a new company come around charging really little because they know, well, that's great, man. Of course, not that great because you're undercutting the crap out of me, but that's fair. That's the American way. But boy, you're not going to be able to stick around very long.
00:12:40
Speaker
Anybody that has grown from 100K to 500K has watched as your overhead increases and suddenly you can't undercut everybody else because you have those overhead costs, other people working for you, you have rent, you have an office, you have a car, all those things that you didn't have when you were just running around with one camera, feeling 100K by yourself. Jake, you said you have to have that on every job. Is that really true?
00:13:08
Speaker
Yes and no. So what you want to make sure is that you're getting that average across all jobs. So that's really easy if every project has that. But there are going to be those projects that have costs that you can't quite mark up for. The things that we ran into the most at Handcrank were travel, location fees, and talent. That was the other big one. Talent's the big one. Talent's the big one you have to be careful of.
00:13:37
Speaker
If you're marking up the talent the same way you're marking up your cost, your fee, for example, what you're paying yourself, you can't really sell that to the client. They're going to say, this is $1,000 talent. Why am I paying $2,000? So there are those costs that you're not going to be able to make a markup. And because of that,
00:13:59
Speaker
every once in a while, you're going to have projects that have less than 40% gross profit. That means, though, that you've got to have some projects with more than 40% gross profit because, again, your average has to be 40% across the board.
00:14:17
Speaker
Yep. Yeah. And that's why you start, you know, one of the, the, the interesting things is that it changes when you start really thinking about profit, it changes the way you think about jobs quite a bit. You kind of mature to this higher level where a suddenly, Oh, wow, we got a $300,000 national ad, but you're only making 15%, you know, gross profit on it. Uh,
00:14:43
Speaker
Suddenly it's not that great because you first of all are working your ever loving ass off on it, but you're not actually hitting your big numbers for the year. Now, if getting that job means that you are going to get that job on top.
00:14:59
Speaker
top of your other base jobs, in other words, pushing your annual revenue up, it could actually work out okay. But if you're still within, let's say you did 500,000 one year, and usually the growth rates are around 10 to 15% for a healthy company, so you might be doing 600 the next year, you're not gonna make it.
00:15:19
Speaker
If you don't have other jobs, which are low talent, using your own gear, all the things that protect profit in a job, all the things that make the job more predictable.
00:15:35
Speaker
And that's what you know, that's the other thing that sort of changes the way you think is like, you start realizing that having job types within your company, which are predictable in style, we used to do a lot of nonprofit work that were very predictable and big moneymakers.
00:15:52
Speaker
They weren't nonprofit for us, and you have jobs that are more corporate in nature and so forth. Those can often be the engine that helps you then to take on some of the more aspirational, super creative work, which sometimes doesn't have the great profit margin, but can be the things that keep your company excited about going to work every day.
00:16:16
Speaker
So I think you have to say, first of all, you need to budget for every job because you're not going to know whether each job is hitting that 40% or not. And then you also need to track across all your budgets. You need to have some kind of tally up.
00:16:34
Speaker
as you're going through the year and say, okay, my revenue has been this, my gross profit has been this, am I hitting my average? And I think when you start doing this exercise of budgeting every job, you're gonna be surprised at what you see. Like Max said, that hand crank, we found out that those nonprofit jobs, even though they were less exciting sometimes, they were,
00:16:59
Speaker
It made you feel good. They made you feel good, but they didn't have that razzle dazzle of that $300,000 national ad. There were a lot of $10,000 jobs that we could count on every year for galas, whatever. They were predictable every year. They were 10,000 and we made 4,000 out of them. And that was our bread and butter. Yep. Yeah.
00:17:21
Speaker
Motion graphics jobs can be that way too. Those also could be pretty predictable. They can get a little out of hand if you're not careful, but they can be pretty predictable. And jobs where you have a really good relationship with the client and you can always bill for any overages that come along. Because the other thing, of course, that will eat your profit directly out from under you are overages, usually in the editing.
Aligning Employee Incentives with Profit Goals
00:17:43
Speaker
Overages being ones that you're not getting paid for, I'm sorry, I should say overruns or something like that because the things that you are not getting paid for, God help you. Yeah, there's an overage where you do, it was known and you get paid for it and you can mark it up so that that overage still hits your first profit number. Oh yeah, absolutely.
00:18:04
Speaker
And there are overruns where you just more expense on your side and you're not getting anything else from the client. Yeah, absolutely. So it does. It just changes. All I'm saying is that looking for profit first after a year of doing this, you'll see how it changes the way you work and how it makes
00:18:23
Speaker
you much more thoughtful about certain things. For instance, let's say you have followed our advice and after getting past 500 to 750 thou a year, you have the salesperson. Well, one question is how are you incentivizing that salesperson? I know it hand crank when we switched from
00:18:42
Speaker
thinking about the total revenue number for the year to thinking more about our profit for the year. We realized, wait a second, we are incentivizing these salespeople. We were paying them a percentage of their total revenue that they brought in, even if they brought in a job that actually had low profit. Well, that was mistake.
00:19:02
Speaker
It was a huge mistake because those salespeople, obviously, of course, being human nature, they're going to go chase those $300,000 projects just because they want to bring in that. They want that top number to look good, that revenue number, because they're getting paid on that. And they're going to forget about those low price tag projects that might have a higher margin, those nonprofits that we were talking about. So if you switch it from a
00:19:31
Speaker
Like we did at Handcrank, we switched it from straight on the revenue to a percentage of the gross profit. A percentage of the gross profit. Remind us what that is. Okay, perfect. So gross profit is the price of the job that you're billing the client minus the cost that you're
00:19:50
Speaker
uh shelling out on that project specifically right so look again locations talent uh gear that you're renting just for that project yeah so going back to our ten thousand dollar job if i'm paying a salesperson 10 percent of the gross profit what would that be
00:20:09
Speaker
Oh, sure. So you are paying, if you're writing a $10,000 project, you're spending $6,000 on project expenses. You're left with $4,000. You're going to pay that salesperson based on that $4,000. They're going to get $400.
00:20:27
Speaker
Maybe. So you have to make it fair if before they were getting 10% of revenue and now you're trying to give them 10% of gross profit. You got to send that number up. You got to change your percentage. Yeah, in fact, I think that's right. I think our number was closer to 20 or more than that, even I can't remember. But yeah, absolutely. You have to
00:20:45
Speaker
you can easily do the math to make it commiserate with what you were doing before but suddenly the job types will start changing and you won't get the crappy job with four hundred talent that you're paying like crazy and and no one's making any money because the sales person is now aligned with your profit goals and that is critical.
00:21:06
Speaker
And I got to say, in some way, you've got to be budgeting that job before you even get it. Maybe you're not doing every line item, which I think you should. We can have a whole podcast on why you should be budgeting it before you even get the job. But in some way, even if you're not budgeting it before you sign the contract, you should have an idea of based on the project type or based on past experience with this client,
00:21:34
Speaker
know that you're going to hit this job if you sign up for it and you're going to get your gross profit number. To wrap up, let's remind ourselves one more time why that profit is so crucial.
Reinvestment Strategies and Conclusion
00:21:50
Speaker
Absolutely. So suddenly you have a budget for your gear and suddenly you know you could reinvest in your company, whether that be gear, whether that be
00:22:03
Speaker
cash reserve, whether that be paying your people, paying your people. Yep. Yep. Spec work is a form of investing back in your company. And you can only do that if you have the profit to support it gear, you know, how if you know that you're going to be bringing in 50 K and profit next year, you know, that you can spend some of that for gear. And, and you, by figuring out
00:22:30
Speaker
which jobs are more predictable and more profitable, you can tailor your gear to those jobs. If you know that you're not going to have those 20 talent, $300,000 national ads, then you probably don't need to buy an ARRI camera. You can probably buy a few Sonys and those are going to align better with the projects you're doing.
00:22:56
Speaker
Obviously, you need to be tracking it on a project-by-project level. Pipeline, our software, not to toot our own horn, does a fabulous job of that. You can get it at videopipeline.io. It does a fabulous job of letting you see exactly where your profit margins are, allows you to set goals visually for us visual folks that aren't super into the financials of everything.
00:23:20
Speaker
So that allows you to do it by project. At the moment, we don't have the ability to track multiple projects. We are working hard at getting that into the software. But you can take those top numbers that pipeline outputs and put them into any kind of spreadsheet and quickly see how you're doing across the board as the year progresses. Or you can use your QuickBooks that you're doing your back-end accounting with to do that. Jake, any other ideas?
00:23:45
Speaker
Yeah, we always use QuickBooks to kind of give us that full year profit and loss statement. And we would also take, at the end of every project, we would look at the profit once, and importantly, we'd look at the actual profit, not how we budgeted it, but how we did against that budget. We'd figure out what that true gross profit was
00:24:09
Speaker
tally it up, every single project kept a running spreadsheet and made sure that throughout the year, we were still progressing towards not only our revenue number, but also our gross profit number and keeping track of what that average gross profit was. That's right. So hopefully this is helpful to you. We hope you'll take it to heart and we hope we will see you again on Crossing the Access, the biz side of video production. Thanks a lot, Jake. Yeah. Thanks for having me. All right. Talk soon.