Figuring The Cost Of Starting An Illustration Business

Many illustrators are unaware of what it will cost them to run an illustration business, while others may be aware but are in denial about it. Most illustrators find it akin to a visit to the dentist. However, a business owner, no matter what type of business they are in, must be aware of the hard cold financial facts behind their business operation. For those illustrators who want to borrow money to start a business, a financial forecast is a necessity, and will be required by a lender for a business loan.

© 2013 Don Arday.

Whether it is referred to as a business financial model, a cost-of-doing-business (CODB) analysis, a pro forma financial calculation, or a break-even expense assessment, a financial evaluation will be required by a lender for a business loan. And even more importantly, it must be known by the illustrator to be able to calculate what to charge for, excuse the pun, services rendered. For illustrators who intend to make a living, support a family, etc., knowing
what it costs to run a business is essential.

Those new to business planning are often surprised by costs they never thought to take into consideration. This is sometimes referred to as “hidden costs”, but that is really a misnomer, for a well thought out, comprehensive, business financial model has no hidden costs.

A thorough financial assessment has three parts: 1) Operating Expenses; 2) Income Stream; and 3) Earnings Projection. This article will focus on the operating expenses, which for illustrator’s who generally work alone, will not only include obvious overhead expenses, but also the less obvious personally requisite ones.

Operating Expense Categories

Studio/Office Rent

Illustrators rent studio space in commercial buildings, or may operate their businesses out of an in-home studio or office space. For commercial rental space the yearly cost is based on the entire sum of the lease agreement. So, if rent is $1000 per month, than the total yearly rental cost is $12,000. If operating a business in the home, the cost is based on the lease cost or mortgage divided by the percentage of space used by the business. If the mortgage is $1500 per month, and the business/studio takes up 33% of the square footage of the home, than the monthly rent is $500, or $6000 per year.

Utilities

Electrical, water, and waste disposal are all utilities with fees that should be considered for an accurate financial assessment, and depending on the needs of the business and the business location, utilities can have an impact on total yearly expenses outlay.

Phone

Similar to rent, if a phone or phones are used exclusively for business than the cost is equal to 100% of the phones and service plans. For example, a cell phone costing $210 including tax with a service plan of $60 per month, which includes taxes and fees, would be a yearly cost of  $930. If a portion of a phone line is used for business it can be prorated for the percentage of usage, so if the usage of the above phone and plan was 25% than the yearly cost would be $232.50.

Internet

Internet costs include the basic subscription to an internet service provider, but may also include fees for a cloud storage or database services, and fees for other online services and subscriptions provided for business needs.

Advertising/Promotion

Everything created for purposes of advertising or promoting a business must be included in a financial analysis. This would include the cost for printed materials such as stationery, any advertising placements, any form of paid online presence, such as a website, etc. This can also include fees paid to designers for any services they provided for promotion. One time fees and monthly arrangements should be combined to determine the total cost of promotion for the business.

Equipment

In the old days equipment for an illustrator meant things like easels, drawing tables, chairs, bookcases, flat files, art-o-graphs, copiers, etc. Today equipment not only includes the latter, but computers, digital tablets, scanners, printers, hard drives, and much more. The cost of which can be substantial. Equipment in general can be described as hard assets.

Studio Supplies

Business

Supplies are a bit more difficult to estimate on a yearly basis because they are often dependent on the volume of work and a specific type of project that will be produced by an illustration studio. Some financial assessments separate office/business supplies from certain art/material supplies. Essentially, business supplies are defined as consumable items, i.e., those that support doing business like staples, paper clips, copier paper, etc.

Resale

The other type of consumables are those that are purchased for resale, such as specialized prints, art materials such as paints, pencils, etc. As an operating expense both business and resale expenses are considered equal, but for a loan application and even tax reporting they have a separate status. Here is an example of a resale consumable. A dimensional illustrator buys Sculpey® modeling clay to produce a figure model that is then purchased by a client. Since it is incorporated into a product that is being sold, the Sculpey® is considered to be purchased for resale.

Dues/Subscriptions

Dues and subscriptions are a necessary expense of being in business. For an illustrator it may be membership dues for the Society of Illustrators, the American Institute of Graphic Arts, the Society of Illustrators L.A., etc. Publication subscriptions provide information, research, and resources for illustrators. This would include fees for tutorial services such as Lynda.com.

Postage/Delivery

No matter what service is used postage and delivery costs should be accounted for. This includes deliveries both to and from the business if paid for by the business. For example, shipping charges for art supplies ordered from Dick-Blick, fees for mailing promotional postcards, etc.

Transportation Expenses

Transportation can include auto mileage used for business and maintenance of an automobile. It can be based on a percentage, if only a portion of the auto usage is for business, or it can be based on the number of miles driven. The cost of auto insurance should be factored in as well. For those who use public transportation, like in New York City, the cost would be subway, bus, and train fares occurred in the course of conducting business. Airline travel can also be considered a business transportation expense if it is not reimbursed by a client or organization.

Cost Per Mile

The Internal Revenue Service issues a standard cost per mile for businesses. The 2014 rates are as follows: 56 cents per mile for business miles driven; 23.5 cents per mile driven for medical or moving purposes; and 14 cents per mile driven in service of charitable organizations.

Professional Services

The cost for services provided by a professional would include legal services, licensing fees, the services of a business accountant or tax preparer, a computer systems or web consultant, etc.

Research

Research costs are expenses associated with research for an illustration assignment. This could be in the form of many different things such as books and other materials needed for visual or informational reference. It could be admission to a zoo or museum, etc.

Insurance

Personal

Health insurance provided by the business is considered personal insurance, which includes life insurance plans, disability plans, and also health and dental plans.

Liability

Liability insurance can include insurance protection covering accidents or mishaps that occur on the business premises, or off premises while performing work for the business, as well as protection from theft, loss or damage to business property.

Payroll

Payroll means the amount of salary and benefits that are paid out to the employees of a business whether they are full-time, part-time, contracted labor, or temporary. And, depending on the size and scope of the business, payroll can be very simple if for a freelance illustrator who intends to work solo, or more complex as in the case of a 10-employee studio.

Operating Expenses Worksheet

Expense Category	Cost Basis/Monthly or %	Yearly Amount
Office/Studio Rent
Utilities
Phone
Internet
Advertising/Promotion
Equipment
Business Supplies
Resale Supplies
Dues/Subscriptions
Postage/Delivery
Transportation
Professional Services
Research
Health Insurance
Liability Insurance
Total Amount

Creating An Illustration Business Plan

There is quite a bit of information available on business planning, but as we illustrators know all to well, the illustration business, is by it’s very nature is different than most other businesses. For one thing, it is neither a service business, nor is it a product providing business, it is both. So right off the bat, business models that only work exclusively for either services or products, which are most of them, are not a good fit for an illustration business.

© 2000 Don Arday.

The most standard business plan is a start-up plan, which defines the steps for a new business. It covers standard topics including the company, product or service, market, forecasts, strategy, implementation milestones, management team, and financial analysis. The financial analysis includes projected sales, profit and loss, balance sheet cash flow, and probably a few other tables. The plan starts with an executive summary and ends with appendices showing monthly projections for the first year.

A strategic plan, or a “hopes and dreams” plan, focuses more on the big picture priorities to provide a framework for making smaller decisions. For the sole-proprietor illustrator, it is a personal plan that provides a definition of the business and a description of future aspirations. Detailed cost factors, equipment needs, space requirements, etc., are not the focal point of a strategic plan.

Do You Need a Business Plan?

If you intend to borrow money for your business, in addition to demonstrating evidence of financial stability, you will need a business plan. Depending on how you look at it, many illustrators do not need to borrow money to start a business. If you don’t have a need to borrow money, a business plan can be an informal one. I said depending on how you look at it, because many illustrators have already taken out a loan for the purpose of creating an illustration business, a student loan for their college education. After all, the debit created by the loan will factor into the illustration business operating costs in some cases for many years.

© 2000 Don Arday.

Even though a business plan may not be necessitated by the need for external financing, having one can be vitally important to how you will make decisions and conduct your business, so it is wise to have a plan. For illustration, the plan can be a strategic plan, a start-up plan, or a combination of the two.

The Strategic Plan Objective

A plan provides guidance. Guidance provides direction. Direction leads to a goal.

The Start-Up Plan Objective

A plan identifies needs. Needs lead to resources. Resources support work.

A business plan should be as simple as possible. It should be appropriate to the scope and circumstances that will constitute your interpretation of your illustration business situation, i.e., your business environment.

Even if you're starting off as a sole-proprietor, and you have your own resources for your business, an informal business plan can greatly improve the chances that your illustration business will succeed. With a plan, you will have a blueprint for building your business in well thought out stages. Special Note: Your business plan should be written for non-artists.

Illustration Business Plan Outline

1. Overview

A brief statement describing your business including location, market segment, etc.

2. Objectives

A statement should be provided for both short-term objectives (three years or less), and long-term objectives (five years or more).

3. Mission Statement

A mission statement to establish a business goal and how you intend to achieve it.

4. Key Advantages

A statement or list of the main areas of specialization or expertise you have to offer. What might make your business different from the competition.

5. Company Synopsis

5a. Type of Company

A company type identifies a prescribed business structure for purposes of legal and tax requirements and advantages. Types of companies include; a sole-proprietorship (single ownership), also called a sole-trader; a partnership (shared ownership); a limited liability company (LLC), a type of partnership; and a corporation. Each type has advantages and disadvantages and should be thoroughly researched as to which will work best for your business.

5b. Inventory

Furniture, equipment, materials, computer hardware, and software should all be included.

5c. Assets and Liabilities

Inventory items should all be listed as assets and given a value for a loan application if appropriate. Liabilities should also be listed, e.g., computer loans, rent, utilities, etc.

5d. Start-Up Requirements

A list of all business start-up needs with a description and the expenditures relating to them. This should contain all aspects needed for your illustration business such as office space including square footage, arrangement, internet, and utilities needs. Include equipment needs such as computers, software, hard drives, printers, scanners, modems, telephones, copiers, etc. List furnishing needs, for instance desks, file cabinets, chairs, easels, taborets, tables, bookshelves, etc. Expendable materials should also be listed and costs estimated. This would include computer, art, and office supplies. Detail the monetary requirements such as rent, utility fees, salaries, insurance premiums, and tax provisions, e.g., self-employment social security contributions, etc.

5e. Support Services

List any support services your business will rely on. Common support services for illustrators include digital output bureaus, photographers, models, delivery services, web hosting providers, etc.

6. Illustration Pricing Structure

An explanation of product and services pricing including the method used for charges, be it based on a lump-sum payment, or an hourly-wage formula or both. There may be a lump sum charge for the illustration/creative itself, and hourly-wage fees for supplemental services such as meeting time, and non-creative production fees.

7. Marketing Strategy

A statement outlining the plan for marketing your illustration business including media and means. Marketing includes all forms of promotion, both purchased and gratis. Purchased refers to those forms of promotion that you have to pay for, while gratis refers to those where the promotion has no cost.

7a. Purchased Promotion

Advertising in any form, either print or online; direct mail; identification and signage; a web presence that might include a website, portfolio hosting sites, a blog (paid), a Facebook subscription (paid), etc. Some less thought of purchased promotions include paid memberships in organizations; entry fees to competitions; and perhaps most importantly, portfolio fabrication and maintenance; etc.

7b. Gratis Promotion
Often overlooked, plans for encouraging client referrals, leveraging networking relationships, and capitalizing on reputation/acknowledgements should be stated.
The internet provides many opportunities for gratis promotion such as a free Facebook page, Google+ page, Twitter account, Linkedin page, Pinterest account, free blog page, membership in online groups, free portfolio sites such as Deviantart, etc.; and more and more new free promotional opportunities are constantly coming available. This continuous change makes gratis promotion somewhat less defined than purchased promotion.

7c. Targets
Targets equate to your intended customer base. It may be one or more specialized markets like publishing or a segment of a market like nature publications; a specific category of work like children’s book illustration; a defined location like the New York city area; a list of specifically sought after clients.

8. Finances

8a. Breakeven Estimation
A breakeven estimation identifies the actual operating costs of a business for the purpose of knowing when earnings represent actual profit.
       
8b. Pro Forma Estimation
If it is necessary to go into detail on the financial aspects of your illustration business, say to secure a loan, you may want to prepare “pro forma” statements for cash flow and profit and loss. A pro forma is a financial statement based on financial assumption or prediction, it can also reflect a financial development that will occur in the future, or has come into effect from the past. An example might be an expected tax break that will occur at reporting time. 

Work Made For Hire Consequences And Considerations

Although the idea of “work for hire” has been around since the mid-nineteenth century, it was first adopted as a doctrine in the Copyright Act of 1909, and is officially titled “work made for hire”. Only two possible obligations can constitute work made for hire. First, if the work was produced for an employer while the creator was under employment. And second, if a written, signed, work made for hire contract, is agreed to by the commissioning party and the commissioned party, i.e., the client and illustrator for work specially ordered or commissioned, and the work meets one of nine possible conditions. Without a written signed agreement, the creator would retain the copyright ownership for work produced, for our purposes, the illustrator.

© 2012 Don Arday.

Employee Condition

Work made for hire is almost universally a condition of any exclusive, full-time employment arrangement. The employer retains all rights to copy and dispose of as they wish, any creative output produced by an employee. This would include all work from idea development, thumbnails, sketches, comps, to finished art.

Non-Employee Condition

The non-employee provision for work made for hire, egregiously and unfortunately, began to flourish in the 1970’s among companies that commission creative works for mass media. In 1976, to protect the rights of the creator, an amendment to the work made for hire doctrine was made to restrict the ability of companies to take advantage of a commission arrangement. The doctrine now states: All three of the following distinct conditions must exist in order for a work made for hire contract to be legal.

1) The work must be specially ordered or commissioned.

So, use of a prior work of art would immediately not qualify as work made for hire, nor would use of a derivative creation based on a prior work of art.

2) The work must meet one of the following nine definitions:

• A contribution to a collective work

• A part of a motion picture or other audiovisual work

• A translation

• A supplementary work (to another author’s work, such as a foreword, chart, or table)

• A compilation

• An instructional text

• A test

• Answer material for a test

• An atlas

Of the nine definitions, two in particular involve illustration more than any of the others, and they are “a contribution to a collective work” and “a supplementary work”. Almost all editorial work produced by an illustrator can be considered supplementary or contributing to a collective work. Magazine illustration is contributing to a collective work. And in most cases, book illustration is supplementing the work of an author. The definitions in both instances can be stretched to include just about any publication or broadcast illustration commission, such as those for advertisements, corporate brochures, web pages, etc. Nearly every commission could conceivably be a work made for hire, but only if agreed upon by the illustrator and the commissioning party.

A work made for hire agreement stating the terms of the arrangement must be in the form of a written contact signed by both involved parties.

Verbal word of mouth arrangements are not considered legally binding. Since a work for hire contract deals with the ownership and disposition of personal property, like purchasing or selling a car or a house, it must be in writing.

Consequences

It is vitally important to consider the following: If a work is "made for hire", the employer, not the illustrator or artist, is considered the legal author and owner of the copyright for the work. Many publishing houses and magazine conglomerates are adopting and enforcing “work made for hire” contracts. This may sound absurd, but bound by one of these “work made for hire” contracts, the original illustrator has no right to; control usage of the image; receive any payments or royalties generated by reuse or resale of the image; produce any derivative works based on the image; or use the image for any purpose without permission. Under a work made for hire contract an illustrator would even have to get permission from the contractor to use a copy of the illustration they produced in their own portfolio, web page, or in a gallery exhibition. For illustrators who work traditionally, producing a physical painting, drawing or sculpture, not only the image, but the object itself, becomes the property of the contractor.

Considerations

There are some types of illustration commissions where a work made for hire agreement may seem to be appropriate. Illustrated logos and trademarks are two examples where the client would need to have complete ownership of image copyright. Still, there are alternative types of agreements that may serve the illustrator better for this sort of work than a work made for hire contract. A "transfer of copyright" agreement may be preferable to work made for hire, and transfers can be exclusive or non-exclusive. In other words, limited by certain conditions made by the illustrator, or unlimited. More information is available at http://www.copyright.gov/circs/circ01.pdf.

Not all work made for hire contracts are alike, so it is very important to read the contract over very carefully. There is no such thing as a standard contract, even though the client may say that the contract is a standard one.

Factors that influence the appropriateness and legitimacy of a work made for hire contract center around how closely, in the course of producing the commissioned illustration, an illustrator conducted himself or herself similarly to a full employee.

The validity of a work made for hire contract is weakened by the following factors:

• If the illustrator worked in their own studio.

• If the illustrator used their own materials and bought supplies themselves.

• If the arrangement is short lived.

• If the illustrator determined their own working hours.

• If the illustrator was paid a flat fee and not by the hour.

• If the illustrator was not on the client’s payroll.

• If the client did not pay the illustrator’s taxes or social security.

There are also other individual factors that would indicate that a work made for hire agreement would be inappropriate, but the bottom line is whether the opportunity merits the sacrifice. There may be a work for hire offer that is extremely lucrative, or of such high profile, that through negotiation of certain conditions, it is worth relinquishing some ownership rights. And, the thought of having to challenge the arrangement in court may never become a reality.

Working With Contracts

There are two very important things to note, when presented with a contract. And they apply whether it is a work made for hire contract or any another type of contract. First, as was mentioned earlier, there is no standard for contracts. Second, an illustrator has the right to amend any contract they are presented with, and it can be as simple as crossing out any terms or conditions that are not agreeable, or editing the wording in the contract, or adding additional provisions to it.

Here’s one way to look at it. When a client presents a contract to an illustrator they wish to hire, think of it as an "offer" from the client. Whether it’s a work made for hire contract or not, it’s perfectly reasonable for the illustrator to present the client with a "counter offer" for their consideration by way of amending the original offer. A negotiation of terms can continue from that point. It is rare for a client to flat out refuse all changes the illustrator requested, but it does occur. When it does, increasing the cost of services may be in order. Be sure any contractual agreement made with a client for control of illustrations will be worth it.

For more information on contracts and agreements see theinformedillustrator.com posts, “Illustrators Agreements & Contracts 1: Components”, and “Illustrators Agreements & Contracts 2: Restrictions”.