Thoughts on Usage Rates, Depreciation and Cash Flow

The photography world seems to be in an almost endless state of flux these days with a plethora of new cameras and lenses popping up in the market like mushrooms after a rain. Debates rage about the future of various brands, technologies and camera formats as folks share their often hard-edged opinions. This certainly is a tumultuous time to consider new photography gear, whether one is an amateur or a working professional. My old, tired brain has been in overdrive lately with thoughts about the potential financial impacts of some of these issues. So, I thought I’d share these mental meanderings with readers.

1) What Gear are We Actually Using and How Often?

This is one of those fundamental questions that we neglect to ask ourselves often enough. Having money tied up in photography gear that is not being used at all, or only on a very sporadic basis, doesn’t make a lot of sense for amateurs and professionals alike.

I’d be the first to admit that over the years I’ve bought more gear than I actually needed, and some of it really didn’t get used as much as it should have to justify the investment that it consumed. Having burned myself a few times in the past, I now have an equipment checklist that I have been using for a couple of years that lists all of the gear that the business owns…and that goes right down to spare batteries, and individual filters.

When I have a client assignment I plan out the gear I’m going to use for that engagement in advance and use my equipment checklist to tick off every piece I will need. I do this for a couple of reasons. The first is so I don’t forget something and show up on site in a less-than-prepared state which can be embarrassing to say the least (this is getting more important the older I get!). The second is so I can actually monitor what gear I’m using and how often. Then, if I decide I need to make some changes with my gear I have some kind of analytical basis on which to make this type of decision.

2) Considering Depreciation and Cash Flow

Working pros will obviously spend more time than would amateur photographers considering the financial impacts of acquiring gear. This is often due to how they have structured their business from a legal perspective (sole proprietorship, corporation, or partnership for example) and what accounting and tax rules they need to follow in the jurisdiction in which they operate.

For example, most jurisdictions have a dollar limit on the value of business assets purchased (like camera gear) that can be immediately expensed. After a certain level of expenditure has been exceeded an individual piece of gear often cannot be expensed in the same calendar year in which it was purchased. Once over the cost threshold it would need to be depreciated over a period of time. The rate of depreciation will depend on the type of gear and the jurisdiction in which the photographer operates, and may also be impacted on how the photographer has set up their business from a legal standpoint.

Sometimes the rate of depreciation is not consistent from year to year. For example, in some jurisdictions a smaller percentage of the purchase price of a piece of camera gear can be depreciated during the first year of ownership. Then, in subsequent years, a higher percentage of the declining balance can then be depreciated. Obviously this can have a significant impact on the cash position of a photographer’s business as it can take many years to recoup the upfront cash investment through depreciation.

Let’s look at a Nikon D810 body as an example. The price of that body in Canada right now is about $3,600 plus taxes. The amount of tax varies by province as Canada has a mix of GST/HST and retail sales taxes. If a photographer registers with the federal government then the GST or HST tax paid becomes an input tax credit and basically flows through the photographer’s business as a credit against the GST or HST that they have collected from clients. Many countries have a VAT (value added tax) and most of them operate in a similar manner.

Let’s get back to our example…the photographer now has a $3,600 asset that cannot be fully expensed in the year in which it was purchased. In essence they cannot get their cash back right away and must adjust their business plan to make allowance for this cash outlay from the business (P.S. it’s always good to remember that the salary we pay ourselves out of our business comes out of cash flow!)

Here’s an example of how depreciation on the D810 could work:

• Year 1: 10% of the purchase price can be depreciated during the first year of ownership. $3,600 x 10% = $360. Depreciated value of the D810 after the first year of ownership is $3,600 – $360 = $3,240. The photographer can claim $360 as an expense in the first year and this amount can be written off against business income.
• Year 2: 20% of the declining balance can be depreciated. $3,240 x 20% = $648. Depreciated value of the D810 after two years of ownership is $3,240 – $648 = $2,592. The photographer can claim $648 as an expense in the second year and this amount can be written off against business income.
• Year 3: 20% of the declining balance can be depreciated. $2,592 x 20% = $518.40. Depreciated value of the D810 after three years of ownership is $2,592 – $518.40 = $2,073.60. The photographer can claim $510.92 as an expense in the third year and this amount can be written off against business income.

So, after three years of use the photographer’s business is still out-of-pocket $2,073.60 in cash. What the D810 is actually worth at that point in the used equipment market is really anyone’s guess. I did have a look at some used D800/D800E camera bodies a couple of months ago and most sellers (with very low shutter count cameras i.e. under 10,000 actuations) were asking about $1,900. I recently found an ad from a professional wedding photographer trying to sell their very high shutter count body (i.e. over 215,000 actuations) for $1,350. An asking price and what someone is actually willing to pay can be very different things!

Suffice to say that in many cases a used camera body cannot be sold for what is it still worth in terms of its depreciated value. Successive bouts of buying gear, partially depreciating it, and then selling it for less than its depreciated value can drain cash reserves from a business and eventually could put it in a precarious financial position in terms of cash flow if a photographer is not careful.

It is also good to remember that most businesses don’t go bankrupt because they do not generate positive margins and are not profitable…it’s because they fail to properly manage their cash flow, which of course includes granting credit and managing their account receivables.

Well accepted, brand-name lenses often fare better in terms of their used values than do camera bodies…well at least that has been the case in the past. It is hard to tell how the used market will value some of the newer ‘third party’ lens offerings and if the quality improvements of these lenses will negatively affect the value of Canon and Nikon glass. Another factor that may come into play is the introduction of newer technology lenses. A good example is the Nikkor 300mm f/4 VR which may end up depressing the value of the older style version of this lens quite a bit.

3) Buy, Lease or Rent?

Various jurisdictions treat equipment leasing in different ways so it is always an excellent idea to get professional accounting advice before going down this road. Often times a lease payment can be fully expensed in the month in which it is incurred. It is quite common that at the end of the lease period the camera body or lens can be purchased for a token amount of money. Even though the gear may cost a bit more due to the finance charge associated with the lease it may be a much better gear acquisition option for a photographer in terms of managing the cash flow of their business.

To illustrate this point let’s say that the added cost to lease the D810 mentioned earlier was 10% and there is a $50 buy-out at the end of a three year lease. The total acquisition cost to the photographer’s business is $3,600 + $360 + $50 = $4,010. The key difference here is that the D810 has been fully expensed against the income of the business during the same 3 year period with an average monthly cash outlay of $111.39. The cash flow of the business has been managed on a much smoother basis. If the body is sold it will now generate some cash that can be put back in the business.

Many photographers will choose to rent camera bodies or lenses for very specific types of assignments and this certainly can make a lot of sense if that type of gear is only used on rare occasions.

4) Consider Career Cycle

How and when we acquire photography gear can be impacted by where we are in our individual career cycles. A successful professional photographer in mid-career who may be anticipating 20 or more revenue-generating years ahead may choose to acquire more gear than someone in the early stages of their career. Someone starting out may have a reduced financial capacity and will likely acquire fewer pieces of gear and choose items that provide the broadest capability for the least amount of cash outlay. Good quality used gear is often a serious consideration. Renting gear may also be more common with folks at this stage as they may not yet have a steady number of assignments.

Photographers who are towards the end of their careers may have a need to convert some of their depreciating assets (i.e. camera gear) into cash as part of their business exit strategy. Camera gear isn’t like wine – it doesn’t get better and more valuable with age. As older photographers begin to think about winding down their careers selling off some gear while it can still command decent prices in the used market may make a lot of financial sense. Folks operating towards the end of their careers may also consider leasing rather than buying gear to help to better coordinate their cash flow with their business exit strategy.

Like other types of specialized service businesses, photographers are essentially selling their time and expertise and once they retire there is very little for the business to sell to someone else in terms of wanting to take it over. Of course, larger photography studios can operate more like professional accounting firms etc. and bring in junior partners who may be allowed to buy into the business over time. This helps to ensure that the senior partners can exit the business profitably. They also will not have the same concern as other photographers would have in terms of the disposition of business assets like camera gear.

5) The Potential Negative Impact of Cognitive Dissonance

As humans we are far more rationalizing than we are rational. We tend to want consistency in our beliefs and our perceptions. When we are faced with conflicting information that challenges what we believe to be true we will tend to gather information that supports our dominant beliefs, and resist anything that opposes them. This helps to reduce our feelings of discomfort that are generated when we are stuck in the middle of conflicting information.

This is also one of the reasons why some participants in photography blogs can become very aggressive and brutish in their discourse – they are unknowingly dealing with high levels of cognitive dissonance stemming from their current strongly-held beliefs being put into question by new or different facts and/or opinions.

If we are not careful all of us can fall prey to cognitive dissonance and make poor business decisions as a result. As photographers this most often happens when we become enthralled with a particular new camera, lens or technological advancement and create the belief within ourselves that we ‘must’ have it to continue to be successful. The stronger this belief becomes in us, the less likely we are able to maintain our objectivity. We will gather more and more data that supports our belief that we need to acquire that new camera or lens, and build up our corresponding expectations about it. That’s also one of the reasons that there is often a big let-down once we actually get the new gear and begin to use it. Becoming enthralled with new photography gear is like riding a technology rainbow and looking for the pot of gold that we believe is there. The ride is exciting but there’s usually disappointment at the end of it.

6) The Importance of Getting Out of the “Photography Bubble”

One of the worst things we can possibly do as photographers is to talk about what gear we’re thinking about buying with other photographers in terms of the business case for the purchase. Putting two, three or a dozen photography gear heads in the same room together will almost always result in a decision that the new gear is absolutely better and is positively, certainly needed! Heck…a lot of these discussions will reveal even more gear we should consider getting!

It is far more productive to discuss a potential gear investment with someone who has good business acumen that we trust, but who knows absolutely nothing about the photography business and couldn’t care less about cameras. When you find someone like that you have found a true pot of gold – an insightful and objective third party!

I recently made some significant changes to the gear we use in our business. I had the opportunity to chat about this over coffee with a trusted friend who I had met more than 20 years ago during my corporate days. He listened intently as I explained what we had done, then after a brief pause, asked me some very pointed questions.

“Do you have any examples of times that you’ve lost any client assignments because you didn’t have this new gear?”
“No, I haven’t lost any. The decision was taken more about future needs.”
“How many more years do you think you’ll keep doing client assignments?”
“Not sure…two or three I suppose.”
“Will you be keeping the new gear once you stop doing client work?”
“No, the business will sell it. I’ll just shoot with my Nikon 1 gear at that point.”
My friend cocked his head to one side and studied me for a moment. “You’ve been away from corporate life far too long…you’ve lost your objectivity.”
“How so?”
“Making a capital investment in a depreciating asset for which you have no proven need, nor for which you have any ROI justification, makes absolutely no business sense what-so-ever. If you were still in corporate life your head would be on a platter. And, to do something like this when you’re in the later stage of your career is counterproductive in terms of how it impacts cash flow with the business. You really need to give your head a shake.”

He was absolutely right of course. Luckily, I was still within the 2-week return window so I could correct my blatant mistake at the cost of a very modest re-stocking charge – about the same as what renting the gear for a weekend would have been. On the positive side, I did have the chance to test out the new gear for a while which helped confirm its terrific capabilities. And, at at some point if I really do need its capability for a client assignment it would be a great choice and I’d have no hesitation renting it. If clients started insisting on that capability on a frequent basis – leasing it could make good business sense.

Beware of technology rainbows and cognitive dissonance…they can snare any one of us.

Article Copyright Thomas Stirr. All rights reserved. No use, duplication or adaptation is allowed without written permission.