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How to work out profit
​from an art sale

For Artists who want to understand 
(1) ​the true costs of an artwork
​and 
​(2) how much profit they made from a sale

Who is this Guide For?
Artists wanting to understand the true costs of an artwork and how much profit they made from a sale
What does it cover?
Identifies a full cost approach to
  • Identify all the costs involved in making art​
  • Estimate gross profit
  • Calculate net profit from the sale of an artwork
  • Calculate net take home pay
  • Estimate an artist’s hourly rate of pay
DOWNLOAD MY GUIDE 'NUMBERS FOR ARTISTS - HOW TO WORK OUT PROFIT'  FOR FREE
making_a_mark_how_to_work_out_profit_from_an_art_sale.pdf
File Size: 266 kb
File Type: pdf
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Copyright Katherine Tyrrell – all rights reserved for commercial purposes. You may use this guide for educational purposes only. You may NOT copy it or use it commercially in a workshop or other fee-paying context without the written prior agreement of and a license being granted by Katherine Tyrrell
NOTE: This guide was first published via 
  • Numbers for Artists: How to work out profit from an art sale | Making A Mark (23 January 2013)
  • Making A Mark Guide: How to work out Profit from an Art Sale | Making A Mark website 

OVERVIEW
​how to work out how much profit you made from an art sale
​

This approach goes beyond the direct costs related to making the art. 
It makes you think about all those other costs that a professional artist aiming to make a living from their art will need to recover and/or pay somehow – or go out of business.

A BASIC APPROACH TO WORKING OUT PROFIT
​

The basic approach to calculating profit takes the money you get for a sale and then
  • Deducts all the DIRECT COSTS i.e. the materials and media used to create the artwork
  • Deducts the COST OF SALES (e.g. commission, shipping, travel etc)
= INCOME AFTER COST OF SALES

  • Deducts other OPERATING OVERHEADS (e.g. fixed costs relating to studio expenses, internet connection etc)
  • Adds back all allowed expenses/tax allowances (e.g. depreciation on capital assets)
= GROSS PROFIT BEFORE TAX

  • Deducts any relevant business / sales tax / VAT = NET PROFIT AFTER TAX
  • Deducts personal tax and pension contributions
= NET INCOME AFTER TAX and contributions

= YOUR TAKE HOME PAY generated by the sale of art!


The latter is the equivalent to a pay packet in a conventional job where the employer deducts tax at source. It’s the sum earned from the sale that you can actually spend on stuff that isn't connected with making art e.g. such as buying food and paying rent for your home.
Picture
It's a proxy - but it's also an eye-opener!

To arrive at a realistic notion of your hourly wage, you can your divide your profit by the number of hours you took to create the work..

So – that’s the overview.

Now we do it slowly and unpick pit by bit.

I've split out all expenses incurred from all expenses allowed for tax purposes. ​This enables a review of what is/is not allowed as an allowable expense (or a tax allowance) in the current tax year. 

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How to work out the "Cost Plus" approach backwards
​

Picture
NOTE:
  • This isn't strictly accurate for proper accounts or doing accounts for the tax man (​i.e. I'm ignoring all the little technical and allowable tweaks which are available) -
  • BUT it gets you to a realistic figure re. profit from the perspective of managing your art business.

​STEP 1: FIRST IDENTIFY THE INCOME FROM THE ART SALE
​

Identify the SALE PRICE the artwork was sold for – gross of any discount (i.e. discount is a cost of sale just like commission)

​STEP 2: NEXT IDENTIFY AND DEDUCT "DIRECT COSTS" to work out NET INCOME 
​

​DIRECT COSTS are the costs specifically associated with the artwork you produced.
​
  • Start with your SET PRICE (or price per square inch multiplied by your most frequent size of image sold)
  • Deduct the MATERIAL COSTS of making the artwork. Another way of looking at this is you are about to find out how much money should be deducted from the sale to replace the materials you've just used up. So deduct the notional cost of raw materials. This isn't an exact science - you are allowed to use approximations! ;) (You could try working out a notional sum per square inch)
  • Deduct the WAGES cost of anybody who helped you make the art (this might be in the form of a supplier's invoice that specifically relates to a piece of art)
  • Direct costs are variable in the sense you don’t incur them unless you actually use art media and supports. For the purposes of this calculation we’ll assume you buy in just enough for the artwork produced – and ignore the stock of at materials that are sitting on the shelves.

= Income net of direct variable costs
This is the figure many artists may think of as profit
- and yet it's a very long way short of real profit! 
If you find yourself going out of business, then this is probably why.

​STEP 3: NEXT WORK OUT YOUR "COST OF SALES"
​

  • Deduct commission or sales fee at whatever percentage or sum is applied by the exhibition, gallery or vendor
  • Deduct any discount offered by you or your art gallery/store e.g. for multiple sales, a "sales" period in your art store
  • Deduct any specific "cost of sales" items that are unrelated to price or size (eg advertising; entry fees; cost of printing catalogues; transport/courier etc). You might want to share these across however many other artworks they cover - but be realistic about how many you actually expect to sell.
  • Deduct the cost of matting/framing. You might reuse frames and mats - in which case determine the replacement cost in the case of a sale as the deduction.

= GROSS PROFIT after Cost of Production

This is the sum available for you to pay:
  • your fixed costs of making art (eg studio, insurance)
  • business taxes and financing costs
  • some wages to yourself 

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​STEP 4: IDENTIFY YOUR TOTAL FIXED COSTS RELATED TO ART
​

FIXED COSTS are the costs which keep on accumulating even when you're not making art. They don't stop when you take time off or go into hospital or on holiday.
For example:
  • rent of studio space;
  • depreciation of capital cost of equipment;
  • professional annual insurance premium
  • professional fees;
  • broadband charges
  • leasing charges

Next step - divide your fixed costs by an estimate of the NUMBER OF ARTWORKS (or units) you sell each year and deduct the proportionate share.

This is much easier to work out if you typically produce work that is all the same size.
If you produce work in different sizes and price bands then work out a way of equating them all to a unit of fixed costs (e.g. small work = 1 unit; medium sized work = 3 units and large work = 5 units)

= GROSS PROFIT before tax and deductions and tax allowances

Remember that in cash terms that

  • this is what drives the cashflow until such time as you get the benefit of the expenses you can set off against tax.
  • this is a useful place to start when you need to think about how much working capital/cash buffer you need to have to be a full-time artist. (i.e. the money you need to be able to incur expenditure so you can buy what you need to generate income - and wait for it to arrive)
  • your working capital requirement may well grow as you grow your business - so don't forget to keep a close eye on this number.

​STEP 5: NOW ADD BACK ALL EXPENSES ALLOWED TO OFFSET TAX
​

This is where you have identified an EXPENSE - and kept the receipt - which you are allowed
  • EITHER claim as a tax allowance
  • OR allowed as an LEGITIMATE business expense to reduce your tax bill. (This is NOT the same as all the expenses you incur. Don't ever claim an expense unless very sure it's recognised as a business expense)
This is where getting help from a tax adviser with what is and is NOT allowed can be very helpful.
Advice from experienced artists who understand their tax accounts and what you can get deductions for can be helpful – but always double check advice from artists as they can sometimes have very curious ideas as to what’s allowed.
​(e.g. can they state where it says in tax guidance this is allowed; do they have this in writing from their accountant?)

= GROSS PROFIT before tax and deductions

​STEP 6: DEDUCT ALL RELEVANT BUSINESS TAXES AND ANY INTEREST PAYMENTS DUE
​

The last deduction of all are the relevant financial outgoings due from the business e.g.
  • payments of a business LOAN INTEREST and
  • payment of all relevant BUSINESS TAXES (i.e. NOT personal tax - you are not your business).

ALWAYS Remember that every country's tax system is unique and what applies in one country might not count in another.

= NET PROFIT after Business Tax and all allowed deductions / allowances

​STEP 7: CALCULATE TAKE HOME PAY


Now we need to work out much net income you actually will 'take home'
  • Calculate how much you can contribute from each sale to your PENSION FUND - because you are planning on having an old age when you just paint for pleasure!  (Depending on your country's tax regime you may be limited as to what percentage of earnings you can use as a pension contribution)
  • Deduct TAX at the variable percentage rate relative to your assumed total income for the year. (e.g. For 2018/19 in the UK basic rate tax is 20% for all income between £11,851 to £46,350)
You may well have a tax allowance but let's assume for the purposes of this exercise that this basic sum is generated by other income which absorbs that allowance - and hence all art income is taxed at the normal rate for your tax band

= NET INCOME which you get to spend on you - and your rent and food etc!
This is how much money you really made from the sale of that artwork! 

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      • How to cost a juried exhibition entry
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    • The Artist-run Gallery
    • The Vanity Gallery
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    • Framing for open exhibitions and art competitions
    • Framing Videos
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    • How to pack artwork >
      • How to pack and ship pastel paintings
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      • Rules of Origin
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    • How to ship art to exhibitions
    • How to mail art - Post & Parcel Services
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  • MONEY & TAX
    • How to work out profit from an art sale
    • How to Price Your Art >
      • How important is price when buying art?
      • Options for Pricing Art
      • Terminology and Formulas for Pricing Art
      • Art Experts on Pricing Art
      • How artists price their art
      • The price of affordable art
    • Payments to Artists >
      • Paying Artists
      • How to create an Invoice
    • VAT for Artists
    • Tax Tips for Artists >
      • Tax on prize money
      • UK Tax Tips for Artists
      • UK: Self-Assessment Video Tips
      • USA Tax Tips for Artists
      • Ireland: Tax for Artists
      • Australia: Tax Tips for Artists
    • Insurance for Art and Artists >
      • Insurance for Art Teachers
      • UK Insurance Policies for art and artists
      • USA & Canada: Insurance Policies for Art and Artists
    • Artists' Grants & Scholarships
    • Retirement and Pensions for Artists
    • The Art Legacy >
      • Estate Planning for Artists
      • Estate Planning for Art Collectors
      • Famous Artists Estates
      • Artwork Inventory
      • After the Death of an Artist
      • Copyright and Resale Rights after Death
      • Art and Inheritance Tax
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