Business in Arch Viz. Vol. 7 - Budget/Expenses/Pricing (Part 2 of 2)

Welcome to the seventh installment of our new RebusFarm Business in Arch Viz series.  Over the next year we will be featuring two articles every month. Each new article will discuss the business side of working in and running businesses in the visualization industry.  We will feature articles from some of the top studios in the world and have in-depth answers to questions that every studio and artist in the industry should know.  

The goal of this series is to provide a long-term resource for not only new artists and business owners entering the industry, but also long-time industry veterans.  The topics will range from contracts and IT infrastructure to hiring and business strategy.

Studios participating in this series include: 2G Studio, ArX Solutions, Beauty and the Bit, Cityscape, DBOX, Designstor, Digit Group, Inc., Factory Fifteen, Kilograph, Luxigon, MIR, Neoscape, Public Square, Steelblue, The Neighbourhood, Transparent House, Urbansimulations and many more. Collectively these companies generate hundreds of millions of dollars a year in revenue, and have decades of experience running some of the most successful businesses in the industry.


We hope you enjoy the series!

We would like to also like to sincerely thank RebusFarm for supporting this series. Through their support they are helping better our industry and contribute significantly to future generations of visualization businesses in our field. If you are looking for one of the best rendering farm companies in the world, we highly recommend checking them out here

Image courtesy ArX Solutions

Do you have dedicated staff in charge of budgets, accounting, quoting? Do any of them have formal training, or was it all learned from experience?

Arx Solutions: Yes we have staff in charge of budgets, accounting, sales etc. Each one is a professional in their own area. They have a big background in the industry and we train them based on our long experience.

Beauty & The Bit: Yes, Lina Garau, the Co-Founder of the company is an experienced accountant and she takes over the administrative part of the business (which bores me so much) so we have a nice kind of chemistry because we compliment ourselves. She´s the genius in the shadow.

Designstor: No, this task is split between several members. They do not have formal training but this is something that we are going to change. 

Factory Fifteen: Yes one person who is both our studio operations manager and internal producer. It’s a combination of 2 official roles full of responsibilities which was taught on the job. 

Kilograph: Yes we do. We have an account management, project management, and account management team. It was hard to implement at first but it has proved necessary in order to grow. They come from advertising, television, and film/ visual effects production. They are able to use some skills from their previous worlds but this is such a highly specific industry that they have had to learn about 80-90% on the job.

MIR: We have an office manager who takes care of all these things. She has her background from booking bands for rock festivals which kind of is the same thing.

Neoscape: We have a select number of employees that are allowed to provide pricing. Experience is a big part of knowing how to price.

Paul Doherty / The Digit Group:  We have an in house financial team, one half dedicated to investment/funding and the other half for back office financials.  They are from outside the industry.

PixelFlakes: Yes, our Managing Director and Office Manager deal with budgeting and quoting, this was learnt from experience as well as online courses. We also employ a book-keeper who visits us monthly and also an accounting agency who offer advice on targets, quotations and accounting issues. 

Public Square: We have a producer that works with our CG and partners to develop the quote. Our producers also handle the accounting and managing the budget. Our producers have background in the industry, but not formal training other than experience.

PURE: Yes we have. And it´s both. Most of them are experienced but we also train them.

2G Studio: Not yet. All the budgets, accounting quoting are still done by me and Evan. The tax accounting is an outsource company. All learned from experience.

Transparent House: We have a core senior team that handles all bidding, and a dedicated controller who handles the accounting. Our accountant has formal training, but our bidding team relies on its strong industry knowledge, largely learned from real-world experience dealing with hundreds of projects over several decades combined.

Image Courtesy: Public Square

For someone new in the industry, can you walk us through the process of setting up a company budget and using that to determine a minimum price in order to be profitable?

Arx Solutions: In order to estimate the minimum price they can run a quick equation. It is not pretty, but for a non technical person this will work:

1- Put all your spending for at last the last three months, if you have information for more months, use it. Include everything there and be honest. The number is going to be a big cat bag. The coffee machine, your salary, the 3D Artist that is working with/for you, pizza delivery, taxes, rent, electricity, your accountant fee, the new internet provider, mobile phone, etc. …. put everything. 

2- Divide that total that you got by the number of months that you use to estimate all your spends. This will give you a very rough number but for the main purpose of this equation, we will call it, “average monthly cost”.

3- Count how many artists you have on your team that are affected to direct production. Note that this is not all the employees who are working with/for you. It is only the artists who are working in production only. We will call it “Total Production team”.

4- Divide the “Average monthly cost “by the “Total Production Team”. It will give you a number that will show you a rough cost estimation. 

5- Add an expected profit margin. Typically we suggest a minimum of 25% but based on our experience it should be in the range of 35 to 40%. Please note that this is not final net business profit. Things tend to go wrong, and when they do they can go really wrong.

Beauty & The Bit: You always have to keep in mind your fixed costs and always leave headroom for unexpected issues (which always appear). Dealing with computers and geeky stuff is always expensive. Further than that the rest will be benefit. But you don't have to be greedy. Be good and do even better, the rest comes by itself.

Designstor: This is a huge topic… Whether it’s a small or large company, it comes down to attempting to account for every expense possible prior to commencing operations. A useful exercise is to set up a personal budget: track every expense over the course of a few months to see where your personal finances go. It’s eye opening and is exactly the kind of thing that one needs to do as an operator of a business. Once one knows where money is spent, one can control how it is spent and then determine operational requirements. Salaries will be the greatest expense. Don’t forget to pay yourself. 

Kilograph: We use the artist’s salaries and a multiplier, determined based on our overhead and our profit, across the number of days and artists we think the project will require. If we know we can’t do the job with fewer artists and in less time we know we’ll lose money and we can’t take the project. 

MIR: This has happened very organic and unplanned for us. For the first couple years, profitability was not a concern at all. As we grew, we used last year’s budgets as basis for new budgets. Since we don't have any investors, we can prioritize other aspects than maximum profitability.

Neoscape: The easiest way is to figure out your billing rate based on all your overhead and then look at how many hours the project is going to take to get done.

Paul Doherty / The Digit Group: Depending on the outcomes (how much profit?) and circumstances (you have start up funding or not) of a start up, it will vary on how aggressive you can be to position yourself in a market.  If you have cash to burn and you are focused on market share, there is a lower priority on profit margins, which means there is usually more of an emphasis on marketing/business development line items.  If little to no investment (under capitalized), and are looking for a place at the table in a market, you usually see a focus on finding initial clients with repeat work and building out a profit margin over a longer period of time.  Line items in this scenario can be heavier on resource and asset costs (people and equipment). 

PixelFlakes: Excel is great for this. Enter all your overheads, including your own salary! So many people may forget this or pay themselves minimum wage. When starting out obviously, this is the case, we didn’t take a steady salary for around 8 months when we started the company. Once you have these you can use basic calculations to figure out your minimum pricing. 

Public Square: I think the easiest mistake to make when putting together budgets is not taking into account the overhead above your team’s time. We have to think about how much it takes to keep our doors open, rent, equipment, utilities, all these things need to be covered from the jobs we produce.

PURE: It's not science rocket. Based on your experience you know what time you need for a special type of shot. X amount in modeling, Y texture, z light setup…etc. This multiplied by our hourly rates you get the most realistic price.

2G Studio: I think first of all, the artist needs to think about the investment on machines, hiring artists, renting a space, hiring client management, project manager. You need to know all the costs and the job desk. At the very first start, definitely you cannot afford to pay all of that, but you can be the client management person, project manager, account manager at the same time for a temporary time. Just make sure you not eliminate those cost, just reduce it. Then when you grow, you can add all of those expense 100 percent on your price. 

Urban Simulations: Lets be honest in this point, it's not an easy way to build a company, there are a lot of points but the key one is the talent, how much you pay for other artist talent is the basic cost to deliver a product to the market, that the minimum price to build a company instead of being a solo professional.

Image Courtesy: PURE

Have there ever been cases where, in hindsight, you would make changes that would change the outcomes of budgets and pricing?

Arx Solutions: Yes, it happens all the time.

Beauty & The Bit: Normally that doesn't happen in our company, as I said our administrative department is really analytic so everything is always in control.

Factory Fifteen: Yes naturally. Nine times out of ten they are creative decisions. But sometimes there is something more technical or underthought through that would affect the profit. 

Kilograph: Yes I think we could include more administrative/ overhead time for more challenging projects. Our account managers spend a great deal of time with clients on more complex projects, this isn’t always apparent at the start of a project.

MIR: In general, animations are much more tolling on our employees than you would think. We have not once had enough time and budget to work with animations in a sustainable way.

Neoscape: Yes, probably on every project :  )

Paul Doherty / The Digit Group: Yes, I wish I would have recognized sooner that raising prices is not punishing my clients, but is a natural maturity in a business relationship.  Be not afraid to ask for your true value in a business relationship. Confidence without being brash is a balance that one must learn over time. 

PixelFlakes: Not any specific examples that we can think of. What’s important to realise, is that if you progress your pricing and budget along with your skillsets and internal infrastructure then you’re on the right path. Having a £500 monthly IT budget is great when you’re a freelancer, but if you start employing people, then that budget needs to increase and subsequently your pricing will also.

Public Square: I think with every project we learn more about the client and or how we would handle things differently with another client. Creative work is so hard to put real numbers too. You have to estimate the time it’s gonna take your artists to the best of your knowledge and try and account for client revisions and package them into your numbers but each client and project is different, so there is always something to be learned on how to handle or budget the next one better.

PURE: yes…

2G Studio: hmm.... for me, no.

Urban Simulations: sure, our behaviour is keeping changes out of our project path, addressing them to a different fees policy in a per-hour basis with a fixed profit.

Steelblue: Yes, but in hindsight is too easy. I think the number one change that we would make is going back and starting with better communication.  Better communication of the process the project will take and the scope of work. If you, or your client, don’t understand the scope and how it’s going to get done clearly, you are starting off on the wrong path to begin with.

Image Courtesy: Steelblue

When you grow a company how do you manage overhead expenses. How do you calculate the risk associated with staff and expenses not directly tied to revenue?

Arx Solutions: As explained before, we spread the cost of this staff in the 3D artists, so if we need somebody new for accounting, that impacts directly on our daily rate.

Beauty & The Bit: As many other things is a matter of trial error. Nobody gets born with a degree on economics so you always try to use your brain and be conservative until a certain point. The rest is a bet so when you bet sometimes you win and sometimes you lose. If you are not excessively risky, everything stays OK.

Designstor: It’s important to set goals for any growth addition, particularly with staff. Hiring staff should bring some level of increased productivity or revenue generation. Setting goals for staff additions and monitoring those goals is key to managing overhead. Efficiency is always a topic to be analyzed and monitored.

Factory Fifteen: Ourself this has been a long hard process of taking the plunge into extra layers of management, I.T, and infrastructure. We have taken these plunges when we have turned a huge profit on a job where we all ‘mucked in’ and invested this into a new producer, or office manager or new server or new studio and so on. So they are calculated risks when the studio is healthy. We may have sacrificed personal development or working on more creative work during this time to ensure stability. 

Kilograph: Yes we do track this very carefully. We started our company with no money so we are building on what we have. This means every expense is carefully examined for its profitability.

MIR: We have always grown very slowly, in average one person per year. We calculate that it takes our new employees at least one year to fit in and generate income. Our main concern with bringing in new personalities in the office is that it can make spirit of the office unstable.

Neoscape: We have always grown organically and tend to shy away from too many overhead staff until we know we can keep them busy. 

Paul Doherty / The Digit Group: Resource planning is the key for company growth.  You can see the data trends if you are disciplined in keeping records, which will assist in you making a more informed decision on when and how to add on additional resources and increase your expenses. 

PixelFlakes: This is tricky and something we’ve been dealing with more over the last year or so. We are moving into a larger office this year for example, we go on annual trips, weekly lunches, conferences, we have employees dedicated to art direction, office management. All those costs don’t directly bring in revenue. What they do is strengthen your product and set you aside from the competition. Clients see and respect that and therefore you’ll find yourself dealing with larger projects and bigger budgets. Therefore, we calculate our risk and factor in these costs when defining our pricing.

Public Square: It’s very tricky. We scale slowly. We work with freelancers to fill in the extra needs when we are busy to supplement our team. Once the pace of the increased work is steady, we’ll make a new hire.

PURE: They all are going into the hourly rates which are the basis for the client calculation.

2G Studio: It depends. If we screw up, my team had to work overtime on daily basis or even on weekend without getting paid. I always teach them to have the responsibility.

Urban Simulations: Its a percent risk you decrease with volume and years of experience. We are always prepared for a 10% or more incoming projects and with flexible freelance to raise the capacity in high seasons.

Steelblue: I won’t go into how we calculate the added staff but I will give you a list of things one needs to consider when putting together their budget. The conversation on the CGA forums has occurred time and time again with responses along the lines of “add A+B+C+D and divide by X”. The formulas are usually lacking the detailed picture so perhaps this is of use to new companies starting to grow.  

Alarm/Security

Advertising/Promotion                        

Automobile Expense    

Bank Service Charges    

Business Licenses and Permits

Cloud Service  

Conference and Network Events

Dues and Subscriptions

Education/Professional Development    

Employee Awards/Incentives    

Entertainment

Hardware

Insurance Expense 

Internet/Cable

Janitor            

Office Supplies

Payroll Expense  

Payroll Tax      

Postage and Delivery    

Printing and Reproduction        

Professional Fees - Legal/Consulting, Payroll Services, Tax Accountant

Rental Expense - Equipment Rental, Office, Vehicle

Repairs and Maintenance

Small Tools                    

Salaries & Wages

Software

 Taxes (Property, City, etc)

 Travel Expense

 Utilities          

Image Courtesy: Steelblue

How do you know how much you should be spending on IT infrastructure and machines as a percentage of revenue or overall income?

Arx Solutions: Don't really know, we tend to have a fixed yearly budget based on our expenses from previous years.

Beauty & The Bit: It is something organic. The growth of our company have always been a geometric progression so if we have to invest in IT is because more people are coming to the office, so in the end the income will be higher. Sometimes it takes more time to glue but finally it compensates and starts giving more benefits.

Designstor: IT spending is all about identifying problems and analyzing potential solutions. Any time an IT solution can solve a problem that is causing person hours, one can analyze the potential savings vs the proposed expense and come to a reasonable conclusion. I’ve learned that infrastructure is a gigantic compromise between what is ideal (super expensive) and what is practical (solves problems and is affordable). Sometimes there are very expensive solutions that solve a problem so well they are worth the expense. 

Factory Fifteen: No % calculator exists for us. It’s all based on foresight and an understanding that these things pay for themselves in the long run. I love the illustration of the 2 teams of workers, both pulling stone. One team is pulling at 100% a square stone, one team is slightly behind but carving a wheel. I think that's a good visual illustration of business in general. Stop, invest smartly, then continue more efficiently.

Kilograph: Whatever we have we spend when we absolutely need to. Unfortunately we are not at a point to allocate budgets to IT. If we need equipment or a new server we had to get it. In really tight times we would lease or finance.

MIR: We don't know anything about this.

Neoscape: We take IT and software licensing very seriously.  We run enterprise level on just about everything which gives our clients more confidence in working with us.  The data is protected and we have the proper insurance in place. We don’t really look at it this way as much as we used to.  I have considered the efficiency of running two shifts as a way to get more mileage out of workstations and software licenses.  Software costs are growing rapidly.

Paul Doherty / The Digit Group: We have a 25% line item annually on capital expenses, which includes IT infrastructure. We are high, but our clientele and business requires us to be in that range.  You should match your IT expenses to who you are as a company.  If you are doing Storage Warehouses off the Interstate, you should not have the need to have high IT expenses… but if you are doing high end work for high end clients, you cannot rely on low end IT. It's all a ratio of business type (Yugo : Commodore 64, Lexus : Quantum Computing)

PixelFlakes: We have an annual budget for aspects such as IT as we find that we purchase different equipment across the course of a year. That being said, we don’t try to hit that budget and only purchase IT equipment as and when necessary. 

Public Square: We don’t have a rule or specific number.

PURE: Experience. We have good experiences with appr. 10-15% of the revenues.

2G Studio: hmm.. I do not calculate it like that though. I buy when I need it, no matter what, but I know in business, the return of investment is for 4 years. That’s all.

Urban Simulations: As a percentage of revenue because it's a key to be profitable, if incomes are going down we have to keep our level of quality and technical improvements to stay on the market.

Steelblue: It is an investment that should be weighed against all other expenses.  What you invest there, you may not be able to invest in other places. We start with a budget based on percentage of revenue that has evolved over the years.  We deviate from this on case by case often driven by if we feel the investment improves productivity and thus elevates the value add of every day of production. 

Image Courtesy: Urban Simulations

What is the approx. percentage breakdown of expenses within the company? (Salary, consultants, insurance, office rent, payroll tax, hardware, software, materials/supplies, entertainment, marketing/advertising etc.)

Arx Solutions: Salaries are by far the most expensive expense in our company, it sums up almost 80% of our spending.

Designstor: Ideally, salaries should take no more than 60% of overall expenses. If a company can be structured and operated around this salary level, the rest will fall into place. If salaries are more than 70%, other key items get left behind. 

Kilograph: 80% salary, the rest are an even split with hardware/ software probably taking the greatest chunk after that. We believe in a living wage for a big city. We also cover 100% healthcare for our employees.

Neoscape: Salary, Insurance, Rent, IT, Software off the top of my head. 

PixelFlakes: Around 50% is spent on salaries / tax. 15% on hardware. 5% on software, 5% on rent, 15% on subcontractors and suppliers. 10% on entertainment / marketing etc.

Public Square: Salary and office rent are number one. We haven’t invested in new hardware and software substantially since I have been here other than for VR, however I would say a good percentage goes to this when getting set up as more of an initial investment until it’s time to upgrade systems.

PURE: Salaries are absolutely the biggest segment.

Urban Simulations: 65% salaries / 4% consultants / 1% insurance / 8% office / 15% payroll taxes / 7% hard - soft

Steelblue: 

Salary: 55-60%

SubConsult: 15-20% (this can be composed of actors, helicopter pilots, IT services, copywriting, voice over artist, makeup artist, electricians)

Insurance ~8% (employees’ health insurance is the vast majority of this expense but also includes workers comp, liability insurance, etc)

Rent: ~7% 

Payroll Tax: ~4%

Everything else: ~6%