Reining in capital expenditures
I want [fill in the blank]. What is it for you: more equipment, a faster computer, a new lens? PPA’s Benchmark Survey recommends the amount a studio should spend annually on capital expenditures of $500 or more each. These would include cameras and camerarelated equipment, computers and computer-related equipment, props, backgrounds, furniture, and fixtures. PPA encourages studios to capitalize these expenditures on the studio’s balance sheet and depreciate them. The benchmark for depreciation expense assumes the studio will depreciate the total cost of the items in the year they were purchased. PPA’s benchmark recommendations for depreciation expense are 3.7 percent for a home studio and 2.2 percent for a retail studio. In other words, in order for a studio with gross annual sales of $100,000 to be within the recommended benchmark for depreciation expense, home studios can spend no more than $3,700 and retail studios no more than $2,200 on capital expenses each year.
I know you’re shaking your head, saying, “But I can’t buy the camera I want for that.” We understand the challenge and encourage you to build reserves for future capital expenditures. In other words, if you don’t incur capital expenditures in the current year, set up a cash reserve for the 3.7 or 2.2 percent, whichever is applicable, and save it for future purchases. In addition to reining in your capital expenditures, you will become very aware your studio’s cash-flow management.
Building reserves is mandatory if a studio is to survive the cyclical nature of a photography business. Not only should you build cash reserves for future capital expenditures, but you should also build reserves for your slow season, production costs, and income taxes. Consider allocating $50 of every deposit toward some type of reserve. You will be amazed at how quickly that account will grow. Your actual depreciation expense in a given year will far exceed the recommended benchmarks, but establishing and replenishing a capital expenditure reserve will help smooth out the cash-flow impact of making these necessary expenditures.
It’s imperative that you plan your capital expenditures. If you’re an equipment junkie, setting financial goals—including capital expenditures—and sticking to them will help curb your spendthrift urges. “The winner” is not the one with the most toys, after all.
The current Benchmark Survey saw an overall reduction in spending, including capital expenditures, from the previous survey. That’s not surprising considering the financial challenges many studios were facing in 2010 when the data was collected. The power of setting financial goals and adhering to the benchmarks helps the studio identify costs to cut. As the economy continues to improve, as studios learn to operate in this environment of cautious consumers, and as owners start to see their studio’s financial performance recover, it’s time to build reserves, not spend them.
If you’re not already tracking your financial position against PPA’s recommended benchmarks, take advantage of PPAedu.com classes, which include videos and webinars to help explain the how’s and why’s of managerial accounting.