Our Best Business Practices for Photographers: Building a Cash Runway
Building a cash runway to help you succeed year after year is one of the best business practices for photographers — one you should consider implementing regardless of what stage your photography business is at.
Starting and running a photography business can be a great way to turn your passion into a sustainable career. However, it's important to remember that running a business is not all about taking pretty pictures. To build a sustainable business, you need to have a solid financial foundation in place. To do so means creating a budget and sticking to it, tracking your expenses, and setting aside money for taxes. It also means being realistic about how much you charge for your services.
Many new photography businesses fail due to financial mismanagement — not because of a lack of talent — so it's vital to understand the basics of accounting and book-keeping. The problems photographers face aren't even necessarily unique to the photography industry. As many as 80 percent of small businesses make it through their first year, which sounds encouraging. But according to Forbes the rate of success drops steeply after that. Approximately 50% of small businesses last five years, while only 33% manage a decade in business. And the reasons for this failure often come down to insufficient financial planning. By taking the time to build a solid financial foundation for your business, you'll set yourself up for success in the long run.
Building a cash runway is one way to help ensure your business' success. A cash runway is essentially a cash reserve that you can rely on to help keep your business afloat during tough times. In this article, we'll outline some of the best business practices for photographers to create a solid financial foundation and build up their cash runway.
What is a cash runway, and why is it one of the best business practices for photographers?
A cash runway is the amount of time a company has to continue operating before running out of cash. This cash reserve is one of the best business practices for photographers because it can be the difference between being able to continue working and having to give up on your dream. When a photographer has a strong cash runway, it means that they have a buffer of time to continue working, and seeking new work, even if they experience a downturn in business. In addition, a substantial cash runway can provide peace of mind allowing you to focus on your work knowing that you have the financial foundation to weather any storms.
Think of a cash runway as your business' savings account. It is there to cushion the blow during tough times or lean months. For example, let's say you have a particularly slow month and only make $500 in profit. If your operating expenses are $2000, you would need to dip into your cash reserve to cover the difference. A few different factors go into calculating your cash runway, but the most important thing to remember is that it's not just the amount of money in your bank account. You must also factor in things like outstanding invoices, upcoming expenses, and other financial commitments.
The goal of creating a cash runway is to clearly understand your financial situation so that you can make informed decisions about how to run your business. With a healthy cash reserve, you'll be able to weather any setbacks and continue growing your dream photography business.
To create the best financial foundation for your photography business, you'll want your cash runway to be large enough to cover several months' expenses. This way, if you have a string of slow months (like during the height of the pandemic), you will still be able to keep your business afloat.
So how do you go about building up this cash reserve?
Three steps to creating a cash runway for your photography business:
There are three things you can do immediately to build up your cash runway. Each one is considered among the best business practices for photographers, but together they'll allow you to create a solid financial foundation to build off for years to come.
Cut back on unnecessary expenses
Take a look at your budget and see where you can cut back. Do you really need that new camera, or could you get by with your old one for a while longer? Every little bit helps, so even if you can only save a few hundred dollars each month, it will add up over time.
Increase your prices every six months
Start charging 5% more for your services every six months. A 5% increase won't seem like a big difference to your clients, especially if you are shooting weddings, as every client is unique. But, this raise will result in a considerable increase in your profits and cash reserve over time. Regular price increases are one of the best business practices for photographers, but taking the plunge and raising your prices can feel daunting. If you're unsure what to charge, research what other photographers in your area are charging. You may be surprised to find that you're actually undercharging.
Build up your cash reserve fund
Make sure you are regularly setting aside money into your cash runway fund. This fund should be money you don't touch except in an emergency. Automate the process by setting up a separate bank account and transferring a fixed amount of money into your cash reserve account each month. By regularly saving a portion of your profits, you'll get into the habit of setting aside money. Once your cash reserve has hit a level where it could sustain you through several lean months, you can begin saving into another account to reinvest into your business with increased marketing or new gear. By building up your cash runway first, you can rest easy, knowing that you have a safety net if you hit a tough patch.
Best business practices for photographers: How to calculate your cash runway fund?
Now that we've discussed what a cash runway is, why it's one of the best business practices for photographers, and how to generate it, let's talk about calculating the cash reserve you'll need.
First, you'll need to gather some information:
- Your monthly expenses
- Your monthly liabilities, if any
- Your planned investments, invoices, etc.
Here are some examples of the type of expenses you will need to include in your cash runway calculations. Please note that these may not match the expenses in your local area or country; they are intended as an example only.
You'll need to compile your fixed expenses — these are the expenses that you pay the same amount for each week, month, or year. They may include any rent you pay for your studio or office, your insurance, software costs, the salary you pay yourself, and your consistent marketing expenses.
You'll also need a list of your variable expenses. These obviously change from year to year, so err on the side of caution, and round up if you need to.
Lastly, you'll need to calculate any other business expenses such as outstanding bills or money earmarked for the growth of your business.
With this information in hand, you can now calculate your cash runway using the following formula:
Total expenses x number of months you want your cash runway to cover
In the above example, the total expenses per month are $36,725. You would ideally want your cash runway to cover six months of expenses.
We've inserted the total expenses per month and our desired cash runway of 6 months into the formula above, which gives us:
$36,725 x 6 = $220,350
This calculation means that your cash runway is $220,350.
Now that you know how to calculate your cash runway, it's time to put this information into action and start building up your cash reserve. Remember, a healthy cash runway will help create a solid financial foundation, ensuring the success of your photography business.
What is the easiest way to achieve your desired cash runway?
The easiest way to achieve your desired cash runway is to set a deadline to generate your cash reserve. In our example, this was $220,350.
Work out what you can realistically save each month by being diligent with your pricing and expenses. You should then be able to divide your cash runway target by the amount you can save each month, giving you the total number of months it will take you to build up a 6-month cash reserve.
Building a cash runway for your photography business — is it worth the effort?
There’s no doubt that taking the time to build up your cash runway is among the best business practices for photographers. With time, perseverance, and some real diligence with your saving plan, you can ensure the financial foundation of your photography business for years to come. If you don’t already have a cash runway in place, there’s never been a better time to start setting one up for yourself. We have all seen over the past couple of years how plans can easily be flipped upside down, and while a global pandemic may seem like an extreme example, many things could cause you to have a tough month or months. Your cash runway will help you weather almost any storm and help you continue to chase your dream when you come out the other side.