An art project could be producing a series of limited prints sculptures or a quantity of one such as an original painting. If you are in business, by definition you are trying to make a profit. You may be trying to make a lot of profit, a little or somewhere in between. How do you know if you are making a profit? There are a couple of ways to determine your project profitability.
- You can go ahead and produce an art project and sell it, you then add up all of your costs and subtract them from your project revenue and whatever is left over is your profit.
- You can take more of a planning/estimating approach by determining what your anticipated profit will be before you start the project.
- If you have already created your project and know your costs then your pricing becomes the most important thing in determining project profitability.
This article is about using a common business tool called a “Break Even” analysis. The idea is to identify all of your project costs combined with your expected sales price to determine how may units you need to sell to yield a profit of zero or “break even”. Of course you will probably want to do more than just break even.
Some Basic Concepts
The cost of producing art or any product or service for that matter consists of two basic types of costs. These costs are called fixed and variable.
These are costs that don’t change whether you produce one piece of art or hundreds. They can be also categorized as overhead. It is important to note that all costs can vary, even fixed costs if the time period is long enough. The normal time horizon to used to identify fixed costs is a year. The amount of fixed costs you apply to your project is generally based on how long the project takes to complete. If the project takes a month to complete then you would apply 1/12 of your annual fixed costs. If the project takes 6 months to complete then you would apply ½ (6/12) of your annual fixed costs to the project and so on.
Some examples of fixed costs:
- Cost of Originals or Masters
- General advertising or marketing
- Depreciation expenses on equipment
- Labor not associated with any product
These are costs which vary by the amount of art or products you make, they are also referred to as direct costs. If you don’t produce anything these costs will be zero. Typically these costs move in a constant way, if you produce two items then your cost will be twice that of producing one item. It is important to separate the cost of buying an inventory of materials or supplies like canvasses from the cost of producing a painting. You may buy a dozen canvasses at a time and incur that cost but for this exercise we are only interested in the cost of the canvasses actually used. Here are some examples of variable costs:
- Direct labor – this is the cost of the labor that actually went into the making of the product. You will also need to include any payroll taxes or employee benefits
- Materials and supplies
- Sales commissions and distribution costs
- Packaging and shipping
- Advertising or marketing directly attributable to the product
- Other components to your projects such as frames, etc
Identifying Your Costs
In order to make this analysis work you will have to keep good records and your accounting system should be set up so that you can easily identify your costs. If you need help ask your accountant. If you are starting a new project take some time to identify your costs. Try not to leave out anything as this will be crucial in determining your break even and project profitability. After a while you should get pretty good at identifying your costs – both fixed and variable.
Putting It All Together
A break even works like this: Take your variable costs associated with a product or project and subtract them from the price at which you will sell the product or project. The amount left over is then applied to covering your fixed costs associated with the product or project. The breakeven will tell you how many products you need to sell in order to cover your fixed costs or break even. Here is an example.
Selling Price for a Limited Print $150
Variable Cost for a Limited Print $10
Contribution To Fixed Costs (Selling Price – Variable Cost) $140
Fixed Costs Associated With Producing Limited Prints $2800
Amount of Prints Needed to Break Even (Fixed costs divided by Contribution – $2800/140) 20 Limited Prints
The general formula is Total Fixed Costs Per Unit /(Unit Sales Price – Total Variable Cost Per Unit)
I have created an Excel spreadsheet to help you with your breakeven. You can download it here: Creatives and Business Breakeven Analysis . Experiment with changing your sales price and costs to see what effect they have on your breakeven point. Before too long you will get the hang of it and you will become better at planning your business and your profits!