Monday, December 22, 2014

Dumb Hookers and Photographers

How much money are you losing when you're not paid when the services are rendered, or even on time?

There's an old saying:

"even the dumbest hooker knows they get paid up-front."

Setting aside the disparagement some of the purveyors of the oldest profession in the world, the sentiment of being paid up-front is obviously a time-honed position.

Consider this - A common credit card has a 17% interest rate on charges.

Why Interest?
Q: Why do people charge an interest rate?

A: It's "the cost of money."

The concept is - if a financial institution loans you money to buy a house, they're not able to use that same money to invest in stocks or other investments that will, over time, increase in value.

Therefore, when a bank loans you $300,000 with 30 years to pay it back at 5% interest, and with you paying a monthly mortgage of $1,654, at the end of 30 years, they will have earned $229,910 in interest and you will have paid a total of $595,639 for that house.

If you were to buy $10,000 in photo equipment, and not pay it off in a year, you would have to pay $1,838.92 in interest if the interest was "compounded monthly" as compared to $1,852.58 if the interest was "compounded daily." As such, the difference between "compounded monthly" and "compounded daily" is $13.66. How does that work? What happens is that "compounded daily" means that on day 1 you owe $10,000.00. At the end of day 1, approximately $4.66 in interest is accrued, and so on day 2 you owe $10,004.66. Compounded monthly, you wouldn't owe any interest until the end of the month, but then you would owe $141.67 in interest.

(Continued after the Jump)

Now, consider the value of your own money - that which you earned. If you earned $5,000 for an assignment, and you get paid that money up front, you could, in theory, immediately invest it in one of the safer investments - bonds - with a 4% return. So, at the end of the year, it would have $5,204 in value. Thus, it should be painfully obvious that if that client waited a year to pay you, you would have lost the ability to make that investment, thus, losing $204. Simple math tells you that if they waited 6 months, you'd have lost $102, and in 90 days, you'd have lost $51.

So, when that client tells you "we pay in 90 days" what they're saying to you is "I know your bill is $5,000, but we're going to pay you in 90 days, and you'll have lost $51 in earning value during that time, so you'll only have earned $4,949.00."

Consider that most clients and vendors should be on a 30 day pay cycle, that same $5,000 has a per-month value of $17.00. That's like a client disavowing a parking garage expense or a two-person fast food meal, "just because…"

Here's the rub - when you incur a $5,000 expense your credit card company wants it paid back in 30 days, or you pay interest. $70.83 at 17%. Where's your $70.83 when a client doesn't pay you in 30 days?

So, on that $1,000 assignment, where's your $14.17 when that client doesn't pay in 30 days?

It compounds. If you're a photographer that does three $500 a week assignments, that's a gross revenue of $78,000. That's 156 assignments a year. The difference between getting paid in 30 days versus in 60 days is, at $7.08 an assignment, an $1,104.48 loss in the power of your money, or doing just over two of those assignments for free.

There are many "standard" payment cycles, all built into your business model and what works for you.

Most wedding photographers take a deposit when the contract is signed and the full amount a week before the wedding, or upon delivery of the proofs (I'd recommend a week before the wedding.)

Many commercial photographers expect a deposit when the contract is signed (so they can start booking air/hotels and incurring other expenses on the clients' behalf) and the balance due on receipt of final images (but before first usage of said images).

Other photographers are on a 14-day, 21-day, or 30-day schedule. Some require clients to pay on the spot with credit cards.

In the end, it's important to recognize the value of your money, and get it as soon as possible.

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