$40,000 Worth of Nothing

Last weekend my town offered free recycling of electronic equipment. Great, I thought, a cheap and convenient chance to unload the old computers, NLE hardware, VCRs and other equipment I wasn’t using and haven’t sold or donated. I filled the minivan and headed over to City Hall. I waited in line for 80 minutes to dump my stuff. My neighbors and I filled 12 tractor-trailer trucks full of electronics. When I got back home, I wondered how much the equipment I’d recycled was worth when new. The total reached $40,000. But last week it was worthless. These days, everything is an expendable.

Several years ago I had a fairly clear separation between expendables and capital expenses-expendables like gaffer tape, videotape and black wrap that I used for one or two jobs; capital expenses like cameras, tripods and VTRs I expected to have a long productive life. Some stuff, like lav mics, cables and software, fell in between those two categories. Today, almost everything does.

Equipment in our business depreciates faster than a five-year-old talks after drinking a double espresso. Now I aim to get two to three years out of something before I need to replace it. That means I need to make sure I get my money’s worth out of the equipment within 24 to 36 months.

When I’m considering purchasing a new bit of kit, I need to be sure that it will generate enough income to justify the price. Or at least that it will keep me from losing so much work that I’m glad I bought the thing. I need to know how many extra dollars per month I must bill.

Here’s an example: If I buy an editing system (computer, boards, storage, audio and video monitors, etc.) for $50,000, and finance 80 percent of the purchase at a 12-percent interest rate, I need to be sure that system brings in $1,500 per month that I wouldn’t otherwise have. (For more on how I arrived at that figure, see the “How Much Per Month?” sidebar below).

At best, that $1,500 represents new business. But it might just be sustained business, as in, if I don’t spend the money, I would miss out on $1,500 per month because I can’t provide what my clients or projects require. If I can’t say, “why yes, we can work with that HD format; not a problem,” then I’m in trouble.

Technology advances like mold across a wet bagel. Although I’m constantly buying new equipment, I don’t hold onto all that much stuff-a couple of nice editing systems and VTRs, as well as a small camera, lights and an audio package. I’m not a facility and I try, with moderate success, to resist facility creep.

I don’t buy enough HD decks to support every format. At this point, the astute reader will think, “Duh.” But let me expand. My business doesn’t generate the $2,600 in HDCAM-SR billings needed to cover the purchase of an $88,000 SRW-5000 HDCAM-SR VTR. If I ever need HDCAM-SR, I can rent it at $1,400 per day.

Agreed-to rental costs are easy to add to an invoice or project budget. But in my part of the market, stretching across the vast plain between DV and HDCAM-SR, there’s often an assumption that anything not rented is included gratis. Some producers expect to pay me for labor and get access to all my equipment for free.

I can’t afford to work that way, but I don’t want to chase away business. My rates and bids are often structured around a single price that includes access to both me and my equipment. I charge a reasonable rate for the gear. I don’t want potential clients to make me work on equipment they provide; that could force me to work with ill-suited gear and leave me without revenue to pay off my idle gear.
For flat-rate projects where I don’t break out labor and rental, the client may not know or care about how labor and rental breaks down, but I need to know so I can track what equipment is earning its keep.
Of course, some equipment does live longer than three years. My Betacam SP VTR is more than three years old and although it’s not getting used much these days, it earned back the purchase price and still generates some money (filed as financial gravy). The same goes for my tripods, lights and a lot of audio equipment; all productive for a decade. But what about computers, some cameras and some other VTRs? Nope.

The answers to two questions indicate if gear has a useful life beyond three years: If you have owned it for nearly three years, would you pay to have it professionally rebuilt or repaired? How close is it to the ones and zeros that make up a digital video image?

This second question comes down to a rule: The further away an item is from a digital recording medium, the longer it holds value. Digital VTRs, hard drives, computers and video boards? Short life spans. Computer and video monitors, speakers and cameras without recorders? Moderate life spans. Lenses, microphones, lights and tripods? Long life spans. But even items far from tapes and drives need to earn back their investment within three years.

One benefit of viewing everything as expendable? I don’t pine for any video equipment I've ditched or sold over the years. Can’t say the same for my dear departed 1957 Telecaster. Sniff. Oh man, I just saw an eBayer selling a ’57 Tele pick guard for $1,999. Hmmm. I wonder how much I can get for that old Plumbicon tube I have somewhere around here.

Determining equipment’s true cost isn’t just about monthly payments. The money invested in equipment could have been invested elsewhere. So we need to factor in a rate of return for our investment that’s above monthly payments. And we need to factor in finance costs. I might buy a $5,000 item with cash on hand, but I can’t do that with a $50,000 purchase.
This isn’t all that hard to calculate, and a spreadsheet calculator made by Frank Capria makes it even easier. Frank, who is both a great editor and an MBA, built an early version of the calculator to help settle an online debate about the true costs of Avid and Final Cut Pro systems. Now you can use it to easily see the monthly billings a system must bring in to justify the investment. Frank assumes purchases will have a three-year useful life, but you set the system price, percent of purchase that’s financed, interest rate and expected rate of return.
Frank’s spreadsheet is free, but requires Microsoft Excel to run. You will find the spreadsheet on Frank’s insightful blog, The TV Weasel (www.capria.tv/calculator).
If that’s too much work, this cheat sheet can give you a rough estimate of how much a purchase needs to bring into your business, assuming 12-percent interest and a 10-percent rate of return.