Add and Subtract: Understanding Overhead

If you're like most photographers, you probably don't really want to know how high your daily expenses are. You just hope that good work will come in, making your overhead a non-issue.

Photographers deal with so many financial stresses already?late-paying clients, huge cash expenditures and a massive amount of credit card debt?it's no wonder they have avoidance issues around money. That said, calculating your overhead doesn't have to be a huge hassle. If you keep track of expenses as you go along (instead of scrambling to input all your receipts right before tax season), you may find yourself happily surprised and liberated by the knowledge of how you spend your money. You'll also be better equipped to weather the inevitable dry spell.

"The point is," says Seattle-based tax accountant and former IRS agent Howard Choder, "that you don't do this for the tax man. You do this for your business and for yourself."



What is overhead?

Also known as "operating expenses," overhead is defined as the amount of money you lay out to run your business each day: Rent, utilities, payroll, vehicle expenses, insurance, communications, paper and supplies, self-promotion expenses, even student loans (if you're just starting out). Expenses you bear on jobs?like film and processing?which ultimately get billed back to your clients, do not count as overhead.

Why the necessity to keep track of each of these items? Former APA-president Jeff Sedlik puts it plainly: "In order to determine your fees, you need to know the cost of keeping your doors open every day so you can bring in enough money to cover costs."

There are other reasons for keeping an eye on your overhead as well. Reducing your taxes is a big one. Because photographers are taxed on their net income (which is gross income minus overhead expenses), the only way to drive that taxable figure down is to keep track of your day-to-day fixed costs.

If all that isn't reason enough, Sedlik points out that a more competitive photography industry these days means that photographers have to be more cost-conscious than ever before: "The industry is saturated with photographers, most of whom face decreased demand for commissioned work. To survive, most photographers will need to reduce overhead."



Where to start?

If you haven't been tracking your overhead expenses, the best advice that tax accountant Choder can give you is to START NOW.

Choder, who works with a number of photographers and creative individuals, recounted in a telephone interview the all-too-common exchange between photographer and accountant each year.

"Hey Jerry," the accountant asks, "Do you know how much money you made this year?"

"I don't know," answers the photographer. "I'm waiting for you to tell me that."

Says Choder, "That's not how it should operate. You need to know at any given time if you're making money, and if you're not, then how do you change it? Are you spending too much or are you not making enough?"

For those organizationally challenged photographers, Choder first suggests that you find a system of collecting business receipts that works for you. He recommends photographers keep a separate business credit card and bank account dedicated only to their business.

"Some photographers use shoeboxes to save their receipts, some use files, and some are so [methodical] they scan all of them. I only care that if you go out and spend money, you document it in some way."

Step two involves inputting the receipts into a computer program that allows you to tally your overhead expenses for a given period. Choder has his clients work off of a custom-designed Excel spreadsheet with line items listing everything from equipment purchases to car payments to legal fees and self-promotion costs [see sidebars at right and next page for examples].

Other popular software options include Mind Your Own Business, Quicken and QuickBooks. Los Angeles-based CPA Harold Nelson recommends that photographers who use QuickBooks hire a QuickBooks Pro Advisor to assist with the initial set-up and maximize the use of the software (a national directory of advisors is available on the QuickBooks Web site). Another helpful resource for figuring overhead is the NPPA Web site where a handy "Cost of Doing Business" calculator lists the gamut of expenses photographers have to account for and calculates the weekly cost of business.

After you input your expenses, you'll then log your income. Ultimately, the goal of all of this is to provide the software with enough information so that it can generate "profit and loss" statements. These will plainly spell out your net income and expenses (just don't forget to subtract your income taxes). "What's important to me," says Choder, "is that photographers are able to keep track of those numbers at least on a monthly basis. And that they're able to determine whether they're making or losing money."

If you are making money, and continue to do so over the years, it's natural, Choder says, that your expenses will rise as your income rises. "That's what you want to do in business," he says, "you want to grow." Take heed, however, of not jacking up your overhead too rapidly (say, taking on several new employees or buying a whole studio's worth of digital gear at once). "I think a lot of businesses expand too quickly and then burn out just as rapidly as a result."



What to cut?

To keep your overhead lean, the first go-to line items which can often be trimmed down are rent and payroll. Both Choder and Nelson agree that studios can drive up overhead budgets immensely. Nelson cites the auxiliary costs associated with running a studio?the security, utilities and phone and internet lines?which can really add up. And these days, many photographers seem to agree.

After only shooting five jobs in his own studio last year, Scott Streble, a Minneapolis-based wedding and commercial photographer, realized that his career was taking a shift to more location-based work. For that reason, he'll be downsizing his studio once his lease runs out this December. Finding a new space will bring his monthly rent costs from $1,800 to under $1,000.

Nashville-based photographer Allen Clark says he traded in his private studio for a share in a local space. "I was tired of being a 'studio daddy,'" he says. "I was tired of dealing with the equipment rentals, party rentals.? I'm on the road 50 percent of the time anyhow." With his new share arrangement, he has studio space available when he needs it, but keeps his gear and office in his home outside the city, saving $1,960 a month on rent, utilities and his daily commute.

Other photographers have not only consolidated their working spaces, but their staffs as well. New York-based portrait shooter Michael Lavine is especially proud of his "streamlined" set-up. "I used to have a studio, two full-time assistants and an agent, all of which I stripped away."

"It's hard to maintain all that stuff," adds Lavine, who made many of the cuts in the post 9/11 slowdown. He says he found unexpected benefits to letting his office manager go. "I was able to take control of my business and really get a sense of what was going on. You lose touch when people do things for you." Now, he says, his office runs so efficiently that his one-day-a-week office manager performs the same tasks as his full-time one did.

If controlling your overhead involves taking a good long look at your whole working setup, you'd be wise to take a peek inside that equipment closet. Jeff Sedlik recommends that photographers sell off any gear that they do not use regularly. "There are costs associated with gear other than the initial purchase, like storage and maintenance costs. By selling your gear, you'll save on these costs and generate additional revenue."

Almost unanimously, the photographers interviewed for this story cited the increased costs of adding digital elements to their workflow as one of their greatest overhead expenses. Streble said his transition to digital forced him to buy new computer gear-like external hard drives and faster machines?to the tune of $15,000 (this doesn't include the $11,000 on new cameras or the cost of his time required to learn the new gear).

Where budget permits, Sedlik recommends that photographers pass some of that digital overhead onto their clients by using digital capture services offered by many labs and studios (like Shoot Digital out of New York or The Icon in Los Angeles). "Capture services provide all necessary gear, and many also handle digital processing, Web galleries for clients and retouching and delivery of final files.? This allows photographers to use the very latest equipment and concentrate on image-making."

While all photographers struggle with things like the cost of rent and new equipment, other expenses vary for photographers from region to region. New York photographers often find themselves overspending on taxis or messengers, but for Tucson-based fine-art photographer Ken Rosenthal, who develops his own split-tone silver prints, his big expense is water. "Out here in the desert, water is a precious commodity," he says, "and it ain't cheap." He keeps his bills in check by using efficient print-washers in his darkroom.

Nancy Nolan, a Little Rock-based commercial photographer says the photographers in her area save on overhead and combat their lack of local resources by pooling what they have. "The photographers here are a pretty tight-knit community,' she says, "so we share a lot. Darkroom space, cameras, backdrops?we swap things back and forth."

Nolan does own up to one area where she isn't as thrifty?her personal work. "I like to use great papers and print things really huge." Her profligacy speaks to a more psychological issue at the heart of a lot of the fear of financial issues with photographers. As Nolan puts it, "When I'm in the creative process, and when I have an idea I'm really hot about, I don't want to look at the money because it puts a box around me even before I start thinking about it."

Pragmatic and unsexy stuff like Excel spreadsheets and P&L statements may seem uninspiring, but ultimately, controlling your overhead will likely enhance, not limit, your creativity. New York-based rep Judith Miller puts it best: "Keeping an eye on your overhead makes you happier and more successful in the long run, because you won't have to compromise your work and take jobs that aren't right for you just to cover the cost of your business." Tips for Saving on Overhead

Running a successful business isn't only about the fees you can rake it; it's about how well you can control what you spend. A few photographers and accountants interviewed for this story share their best advice on getting a handle on what you spend.



1. Save on rent and payroll?share space and staff, or look for interns through local colleges for extra office help.



2. Note to equipment junkies?your profession does not give you a license to spend all the time. And using the old "it's a tax write-off" excuse doesn't always hold water. If you had restrained from buying that new piece of un-needed equipment, you'd have saved the entire cost, not just the tax.



3. Don't always think you need to buy top-of-the-line. Think about your real needs (not just preferences). In some cases, you might want to splurge on a printer, but save on a scanner.



4. Check state-sponsored small business programs (like HealthyNY) for health insurance.

5. There is no need to obsess about every penny spent, but keep an eye on the little things that come up regularly. Ordering lunch for you and your office manager every day costs $20. Multiply that by 5 days a week, and 50 weeks a year, and that's $5,000 per annum on lunch.



6. Don't assume that your overhead will decrease in a "cheaper" city. Sometimes the lighter rent gets offset by weaker fees in smaller photo markets.



7. Invoice clients for rental of your own equipment, if possible.



8. Share resources?hardware and knowledge?with fellow photographers in your community.

Sample Expense Sheet

Year End Profit Loss Statement