Pricing Work by Anne Havel - "Use Last Year's Tax Return to Determine What You Need to Earn From Your Business
Anne Havel, a former accountant and Chief Financial Officer, is writing as a Guest Author for ASK Harriete. In this second of three posts, Ms. Havel applies her accountant experience using last year's tax return to calculate how much money you need to earn for calculating the price of your work. The first post with Anne Havel is Pricing Your Work - The Three Most Common Mistakes Made by Artists When Pricing Their Work.
Note: The opinions expressed by the author, Anne Havel in this post are hers and hers alone, and do not necessarily reflect the opinions of ASKHarriete or Harriete Estel Berman. No endorsement or refutation is intended or implied.
FROM THE ACCOUNTANT PENCIL OF ANNE HAVEL:
Here's the nutshell education of how to look at pricing your work. Use last year's tax return as a guide because it summarizes an entire year's expenses. If prepared properly your Schedule C provides a wealth of information.
Artists and Makers are always thinking "time and materials" since it may seem that's all we've got. The time we invest in producing everything in the studio may be the primary driver, but there are many more considerations.
STEP 1. Track direct materials cost. Take your total for the year and divide by the total number of pieces to get an average cost per piece. [Note from Harriete: This method works if you make relatively similar items throughout the year.]
STEP 2. Keep track of your hours of direct labor in each piece.
STEP 3. Account for your Overhead. This has several components.
a. Indirect Materials. These are materials used by most projects-- drill bits, burrs, files, small tools, wax, blades, paints, canvas, paper, solvents, brushes, tape, wood, nails, screws, chemicals, etc.
b. Overhead Labor. How much time do you spend on your business but not producing any specific piece/artwork? (Most people way underestimate this number. Be honest with yourself. Even if you can't pay yourself for every hour, at least, understand how much time you are investing in your Overhead Labor.)
c. Overhead Expenses. This includes other business expenses such as telephone, Internet service, studio rent, office supplies, photography, mailings, travel, etc.
STEP 4. Know your personal life expenses. This is what you need to live on. It is the sum of all your personal expenses not related to your art business. This is also the amount that you must cover after you pay all your business expenses. Please remember that taxes, if you owe any, must be in this number each year.
NOW THAT WE HAVE OUR NUMBERS...
Start with the number in STEP 4, your personal life expenses, as the beginning. Let's say it is $50,000.
This is what you must make in addition to all your business expenses.
Then add total material costs in the pieces sold last year.
Let's say that's $10,000.
Now, the tax return (from last year) should also give us the total indirect materials and overhead expenses. And let's say that's $5,000 for indirect materials and $15,000 for overhead expenses.
That is another $20,000.
Add them all together and you have $80,000. This is the full amount of revenue that we need to generate to stay afloat.
Let's re-examine this more closely to make a critical point. The sum of all our business expenses ($10,000 + $5,000 + $15,000) equals only $30,000. But you need to generate $80,000 to stay afloat!
It is now obvious that a pricing formula that only includes "time and materials" will fall short. So how do we factor that other $50,000 into our pricing? That will be the subject of the next post.
To the readers of ASK Harriete: I know Anne Havel thinks this is all quite straight forward, and an easy, simple description for how to price your work, but I am feeling overwhelmed already. No wonder accountants spend years learning accounting. The next post will start with our annual expenses for " pricing our work" by Anne Havel.