In January 2014, my partner and I officially launched our video production company. Focusing on a niche area of video technology in a large metro area in the US, the two of us dedicated ourselves to building a company that was sustainable, profitable, and made the world a better place.
To be honest, neither of us really knew what we were doing. We didn’t know other entrepreneurs or business owners. As introverts, even thinking about cold-calling prospective clients was enough to bring on a case of the “fuck-its”. And I think between us, we probably had about $1,000 in savings. Not exactly “quit your job and go all-in” kind of money.
While building the company, I spent a lot of my free time learning how others had done it. I read everything I could on entrepreneurship and small business management. Whenever I met other small business owners, I would squeeze every drop of advice from their brains I could. Using a networking app called Shapr, I met dozens of like-minded folks with all sorts of backgrounds: finance, technology, public speaking. Everyone had advice for me. I absorbed it all.
One thing I learned right away: people are scared to share their business numbers. This secrecy always frustrated me: how do I know if I’m spending my money right?
A week before Christmas in 2017, we billed our millionth dollar as a company. It took us almost four years to cross that threshold. What follows is a breakdown of how we spent that money. I’m hoping that others may be able to absorb the information here and use it to make their businesses better.
Look #1: Total Revenue, Year-over-year http://ift.tt/2miGZdg
Our company’s growth since 2014 has been linear. With no formal marketing or sales team, we rely heavily on word-of-mouth and repeat business. As we add more clients to our roster, we have more repeating business. That and word-of-mouth referrals account for about 65% of our annual revenue growth.
The other 35% comes from new clients, who primarily find us through our website. Since we operate in a particular niche, I knew it was going to be important to optimize our website for search. Although I have no formal training in SEO, I understand it conceptually: in order to rank highly for certain keywords, you must demonstrate that your content is valuable to the audience. Signals that search engines look for include bounce rate, time on page, referral links from other trusted domains, mobile-friendliness, and site load times. Regardless of how Google’s PageRank algorithm changes, those are the variables you need to optimize.
We built our website on WordPress, mostly because it was a framework with which I already had some experience. Looking at other companies’ sites for inspiration, we settled on modern, responsive, brand-friendly theme. Over time, we’ve added some plugins to help with search engine optimization (Yoast), security (WordFence), page optimization (W3 Total Cache), and data collection (Google Analytics, Contact Form 7). That’s basically our entire web framework.
Look #2: Advertising Returns
In 2014, we did not participate in any paid traffic promotion. It felt risky, because we didn’t have a lot of money to waste. In 2015, we began performing small ($100 or less) ad campaigns on Yelp, Google, LinkedIn, Facebook, and Twitter. We saw near-immediate results on Yelp, but the quality and type of projects were not a good fit for us. Advertising on LinkedIn, Facebook, and Twitter got us nowhere. It wasn’t until we experimented with Google Adwords that we began to see results.
Once we recognized that money gained > money spent on Google Adwords, we retained a SEO firm to manage a campaign for us. We gave them a budget of $1,250/month and paid them a $250 monthly management fee. It took about three months before we booked our first project from a Google Ad, so we sunk nearly $4,000 before our first contract.
Our run with them lasted for all of 2016. During that year, we saw our biggest change in revenue: a gain of $125,904.11. However, our Advertising Return Rate (total change in revenue divided by advertising budget) was only 5.39.
Having finally collected enough data to be statistically meaningful, we released our SEO firm at the end of 2016 and began managing campaigns ourselves. We spent less money and, though our revenue increase was smaller at $103,956.10, our Advertising Return Rate increased to 7.27.
In addition to PPC campaigns, we have experimented with event advertising, premier listings on industry websites, and reverse-IP tracking. We haven’t been able to gauge the success of those campaigns, but we did kill our reverse-IP experiment because it felt a bit like a breach of privacy.
Look #3: COGS
As a service-based business, our COGS (cost of goods sold) is quite low. Other than equipment rental, crew, and development costs, there’s not much other than hours of our time that goes into a production.
Because we were bootstrapped with almost no money, we started with a very small equipment inventory: just a camera, tripod, microphone, and computer. As such, we have to rent gear for most of our jobs. While renting increases the overall size of your projects, it eats heavily into your margins. Over the years, we have slowly added to our equipment inventory by keeping diligent notes on the items we rent most frequently and purchasing them when we have the opportunity. The growth in equipment rental costs is attributed to the growth in scope for our projects.
Our biggest cost has always been subcontractors. We pay our freelancers better than average because we want them to stick around. (They also serve as an informal referral network.) Some productions require a crew of 10 or more, often with specialty positions like sat truck engineering or teleprompter operation. For those positions, we will likely always have to hire outside of our company. But as we’ve added full-time employees to our company, we’ve phased out much of our freelance hires.
We hired our first full-time employee in 2016, and added two more in 2017. Even though our gross profit grew substantially from 2016 to 2017, our COGS stayed relatively flat.
Look #4: Compensation
The business has been our sole source of income since 2014, so it’s critical that we’re able to pay ourselves a living wage. It’s an LLC and operates as a pass-through entity, so net income flows to us at tax time anyway.
We decided at the very beginning to pay ourselves a regular salary rather than just cashing checks whenever they came in. This made our cash flow much more predictable.
Over the years, we have experimented with different methods of payment. For 2014, we had no real system in place so we just paid ourselves via guaranteed payments. That made taxes a nightmare, so in 2015, we invested in a payroll system (ADP) and paid ourselves regular paychecks. When we finally got tired of doing our own taxes, we retained a CPA firm who helped us pay ourselves more efficiently. They recommended we move back to guaranteed payments for 2017, and since they handled all our tax filings, we agreed.
Since we used guaranteed payments in ‘14 and ‘17, you don’t see the full tax picture for those years. We paid about $16,000 in taxes in ‘14, and an additional $28,000 in ‘17.
Look #5: Putting It All Together
So how does that million dollars break down? Like this:
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29% - Guaranteed Payments/Owner Salaries. With two owners, we’ve each averaged a little over $38,000 per year.
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21% - Total Cost of Goods Sold. Every dollar we sell costs $.21 to make. We plan on reducing this by making better equipment investments.
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20% - Employee wages/payroll expenses. As we add employees, this percentage will likely increase while owner salaries decrease.
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11% - Net Operating Income. This is our profit after everything is left over. Most of this gets re-invested into the business or paid out in taxes.
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5% - Advertising. We’ve proven that advertising increases our revenue, so we will continue to spend in the same range while increasing our efficiency.
I hope that someone is able to use this information. I’m happy to answer any questions!
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