10

The Financial Plan

Get your facts first; then you can distort them as you please.

MARK TWAIN

Forecasting Without Fear

Predicting the future has been popular since the days of Nostradamus. No one can afford to run a business without looking ahead. Only when you have a clear picture of your company’s potential growth can you proceed with a feeling of confidence. In the past 500 years, little has changed except the technology. For filmmakers, predicting the revenue of films yet to be made is a necessity. This chapter reviews how to find data, what to do with it after you find it, and how to create your own financial forecasts.

Students often object to looking up boxoffice grosses for a class assignment. Their idea of a business plan is a description of their films and, possibly, general market and distribution information. Although important, these items pale in importance to projected income. Remember the investors? They are going to read the Executive Summary first and then go quickly to the revenues and expenses. Money is the glue that holds these building blocks together. Before investors hand over hard cash, they want to believe that your project will be profitable.

Forecasting is an art, albeit not a precise one. Sophisticated business writers like to say that the one sure thing about a prediction is that it will be wrong; they are probably right. The value of a forecast is as a guide for making decisions; the better informed the forecaster, the closer to actual events the forecast will be. By researching history, looking for relationships among the data you find, and making assumptions about the future based on those relationships, you have a basis for predicting your future grosses.

When writing your proposal, you have to decide which group of numbers tells your story best. The most recent data may be a year or two behind because of the flow of revenues. You therefore have the opportunity to forecast to the current period, putting whatever spin on these statistics you feel is justified. Your description of independent distribution should involve more than just how many films there were and how much money they took in as a group. Your goal is to show that the independent film market is robust and that profits have nowhere to go but up.

Anyone Can Do It

There is no mystery to forecasting revenues and expenses. You do not have to be an accountant or hold an M.B.A. You do not need a previous knowledge of trend analysis, regression and correlation points, or internal rate of return. This jargon is used by financial whiz kids to speak to one another; life can go on without it. The information that you uncover can be used to create the numbers that make a company look feasible. You will take the elements that seem to influence the outcome of a film—genre, stars, director, distribution, ancillary returns—and analyze how much you think each will influence the resulting revenue. The only math skills you will need are adding, subtracting, multiplying, and dividing. Mix these skills with a little gut feeling, and you have a forecast. If you can balance your checkbook, you can create a forecast.

Finding the Data

In predicting the future revenues for your films (or other projects), you need to know what has happened in the recent past (five years). Where do you look? You might try trade papers, industry magazines, regular newspapers and magazines, festivals and film markets, seminars, and other industry meetings. These sources were discussed in Chapter 5, “The Markets.” Let’s look at some specific data that you can uncover in your research. Every Tuesday, the trade papers (The Hollywood Reporter and Daily Variety) publish the 60 top-grossing films for the previous week through Sunday. The boxoffice grosses in these tables equal the total domestic gross sales for the film. Since they include Canada, the grosses are really North American, but for convenience we will refer to them as U.S. grosses. The majority of the films on the list used to be studio productions. However, for the past few years, 30 or more of those films in any given week are independent. With the increasing propensity of studios to become co-financing partners with less than 50 percent of the film, more of the films are independent than we can easily identify.

Both Variety and The Hollywood Reporter have put boxoffice grosses online. With a subscription, you can track the domestic box office for films in Variety from March 1994. For foreign box office, complete data is available for 16 countries from March 27, 1997, for major territories. Let us say that you want to know the boxoffice totals, number of screens, and other figures for Friends with Money. The most recent data is for the weekend of May 14, 2006. The U.S. boxoffice gross (remember, this includes the exhibitor) is $11,132,271. The film is showing on 404 screens, down 229 from the previous week. If you want to follow the revenue from the beginning, put the film’s name in the “Search film title” box at the top of the page. You will find that the film opened on April 4 on 28 screens for a total of $795,343.

The boxoffice grosses are collected and estimated by a company called Entertainment Data, Inc. (EDI). Because the weekly lists contain no more than 60 films, a film might continue in release but not have a high enough box office to appear on the charts for its entire theatrical run. Experience shows that the trade lists give a majority of the grosses. Occasionally, a film will reappear on the list as it begins to rise in total box office again. Lists published annually give a total recap of many of the film grosses, but you may not have the time to wait that long. If you do not subscribe to the trade papers online or in print and your local college library does not have them, check the major booksellers. Many of them carry Weekly Variety and sometimes the daily trades. If you are really into keeping your own database, the UK trade paper Screen International (also online at www.screendaily.com) is another good resource. Among the free databases on the Internet, I recommend www.boxofficemojo.com and www.imdb.com.

I also encourage clients and students to talk to producers or directors of the film in which they are interested. Independent filmmakers are very generous with one other. Having someone interested enough in your film to call is very flattering. Alternatively, you might call the distributor, if it is a smallish company. Distributors love to report high grosses. Budgets are another story. Depending on whether the filmmaker is looking for a distributor or wants to brag about how well the grosses have done on a low budget, you may or may not know the real budget. Unfortunately, the revenue is only part of the story. A $24.6-million gross with a budget of $6.5 million is a lot more impressive than it would be with a budget of $10 million. You have to go with the best information you can get. Do not make up the numbers. There are enough resources out there to find a reference to the budget.

Interviews with filmmakers in the public press are another good source. Check the week or two before release. For recent film releases, check television and radio shows for the appearance of a filmmaker. Young filmmakers appear often on the daytime and evening talk shows. Watch CNN, E! Entertainment Channel, Oprah, Charlie Rose, and all the news programs, especially on the all-news channels. In recent years, the Independent Film Channel and the Sundance Channel have gone on air in selected markets; naturally, they are dedicated to information about independent films.

The film festivals are another place where you can gather extensive financial information. Many producers and directors of independent films attend, and they will usually answer questions about not only the cost of their films, but also the source of their financing. People often feel more comfortable about revealing proprietary data when face-to-face. Also watch the Oscar telecast and the Cannes Film Festival Awards (broadcast on Bravo). You never know what you might learn.

Now that you have the boxoffice and budget figures, you can estimate the rentals (review the tables in Chapter 4, “The Industry”). It has been assumed that 50 percent is the studio’s average share of the box office and that 50 percent (up from 49 percent since the previous edition of this book and 45 percent from the early to mid-1990s) is the amount returned to the independent distributor. In working with these numbers, it is necessary to use the average return. If you are projecting your own film with a specific distribution or booking method, then you can figure that into your equation.

Foreign and Other Data

Foreign rental revenues of independent films are harder to obtain. Because these papers cover only the top-10 films in each country, more high-budget studio films than low-budget independent films can be tracked this way.

The vast majority of foreign theatrical revenues arrive within 15 to 24 months of the U.S. release. For your purposes, using the total return is acceptable. You can also use Table 10.1 to get an estimate for each country. Keep this to yourself, however, and only give your investors total foreign numbers. If anyone expects you to estimate each country separately, resist the urge. You may be painting yourself into a corner; remember what we said about implied promises?

Revenues from cable, free television, video, and other ancillary sources are published in the individual industry trade journals and newsletters. To find the results for specific films, you may end up having to spend money on an Internet subscription service such as Baseline (blssi.com) or a consultant such as Business Strategies. Magazines published specifically for the video and cable industries are also a source of data. Check local libraries, especially at the film schools, to see what information they carry. Occasionally, U.S. and worldwide numbers are reported in articles that sum up the past year. You may also be able to find models, such as the one in Table 4.2. Models are not meant to represent any particular film but give you a measure of the average. They are published in books and occasionally trade papers.

Average Foreign Revenues

Several sources provide the latest information on typical revenues from individual foreign territories. “The Going Rate” in The Holly-wood Reporter and “Global Prices” in Variety during the American Film Market and Cannes are good sources. The films are divided into budget categories, such as $750,000 to $1 million, $1 to $3 million, $3 to $6 million, and $6 to $12 million. The classifications depend on who has provided the list. They provide high and low prices for theatrical films.

Some of the foreign trade magazines gather data. Usually, these numbers are released around the time of the AFM and can be obtained there quite easily. You might also research the trade papers for late February and early March, when the market is held. Table 10.1 is a compilation of average territory sales gathered from individual distributors. These numbers are not boxoffice totals, but represent the average advances from distributors in that territory. As this may be the only money you ever get from them, you can use it to get a general idea of your prospects. The range of likely prices is based on the distributors’ experience in selling low-budget films. When forecasting, you always want to be conservative, so you would use the average return of dollars. For example, looking at Japan, you see that the high is $70,000 and the low is $20,000. This does not mean that all distributors will pay you $70,000; generally, the most they will pay is 10 percent of the budget. Use the average figure, which is $45,000.

TABLE 10.1
Potential Sales by Territory for Budgets up to $1.5 Million (in Thousands of Dollars)

Note: Sales dollars courtesy of various distributors.

∗Do not total the averages.

What Has Happened?

There is no question about it: You must analyze this data before putting it into your proposal. I have said it before, but filmmakers have convinced me that I cannot say it too often. This analysis is your job, not the investor’s. Do not expect the investor to accidentally happen upon useful information while browsing through the 15 or 20 pages you have photocopied from newspapers and magazines. It is your duty to find useful information and present it in an easily understandable way.

The data that you gather about previously released films will serve two purposes: (1) show the profits (if any) of films recently released, and (2) supply a basis for estimating the revenues for your films. The first part of your numerical story consists of showing what has happened with films that have already been produced and released. You use these examples to build a case for the ultimate success of your film. Select recent films that have a relation to your planned production in terms of genre, budget, or other common factors. Try not to go back more than five years, as changes in the box office make older films less comparable. If you are dealing with a new or recent genre, of course, you may not have this option. For example, because The Blair Witch Project was a pseudo-documentary and there were no recently successful mockumentaries to compare it to, its financial plan included one table of feature-length documentaries and another table of low-budget films. Since Scream was a $10 million film and This Is Spinal Tap, the most successful mockumentary up to that point, was too old (1984) for the numbers to be comparative, both of those films were discussed in the Markets section.

Genre is a common way to group films; however, use whatever characteristic you feel links these films together. But whatever your rationale for grouping films, use budget clusters that make sense. If your film has a $1.5 million budget, films in the $30,000 to $5 million range are okay. If you used the $1 to $2 million range, there would be few films. If you go over $5 million, you will have films that have elements you cannot match, such as better production values, cost of prints and ads, and quality of cast. With the advent of digital film, this concept is becoming increasingly more difficult for filmmakers to comprehend. At this point, of course, there aren’t enough films to compare. When your $30,000 is upped to 35mm, what will it really look like? Try not to fantasize for a moment. Is it really going to look like $5 million on the screen? Will it have the same cast that a $5 million film will have? When comparing your film to other movies, remember that the audience doesn’t care how you made the film; it cares about what the film looks like and who is in it.

The films you include in your business plan depend on what is available. It is your choice whether to include films that have lost money. There is no database that includes all the films ever made, so you can’t have a “fair” sampling no matter what you do. However, if you use only five films but they are all films with extraordinary results—The Blair Witch Project, My Big Fat Greek Wedding, Napoleon Dynamite—any projection you make will be unrealistic and recognized as such by most investors. Of course, if your budget is in the range of these films, you can’t use Lord of the Rings—any of them.

Whatever tact you take, heed this warning: DO NOT INVENT NUMBERS. If lying does not bother you, getting caught in a lie will. Then the game will be over. If boxoffice grosses are all you can find, then that is what you must use. Tables 11.1 through

11.6 included with the sample business plan (see Chapter 11) are examples of methods for presenting this information. Tables 11.1 through 11.4 show comparative films. Table 11.5 shows the revenues and expenses for each film, and Table 11.6 shows the cash flow over time. The films listed in the table are fictional but are based on the actual results of real films. These sample tables include the following items:

1. Domestic theatrical rentals: Domestic rentals are the portion of the U.S. theatrical box office that reverts back to the distributor (or producer). (The tables in the trades include Canadian boxoffice figures in this total.) If only boxoffice figures are available, you can assume 50 percent of the total for this number. For individual films, it could be a little lower or higher.

   When working with numbers, you should avoid factoring in exceptional movies that would make all your averages too high. If you want to include My Big Fat Greek Wedding, list it and indicate in a footnote that it is in your chart for reference only. On the other hand, if you have a $30 million film, forget it. Just as on any given day any team can win, it is theoretically possible for any film to be a breakout hit. For the purposes of estimating and projecting, however, you should use more typical results. Mark Twain said, “There are three kinds of lies: lies, damned lies, and statistics.” Reflect on this.

2. Domestic ancillary revenue: The ancillary revenue includes all nontheatrical sources, such as cable, DVD, video, free television, syndicated television, and pay-per-view. Distributors have been trying various formulations of revenue sharing as opposed to paying per unit. However, it is too early to know the effect on independent film. Pay-per-view (movies on demand) is growing, although not as quickly as analysts have expected. Although release times (windows) into home video have become shorter for studio films, the windows for indies have remained the same. Cable and the premium channels are getting movies sooner than they used to, also. Be aware that although a few of the indie films financed by cable networks have had a U.S. theatrical release, most do not. In the past, PBS has also financed documentaries that have had a theatrical release prior to being shown on television.
3. Foreign theatrical revenue: The distributor is responsible for collecting money from the foreign box office, which includes all countries except the United States and Canada. Some films that do only moderately well in the United States do much better overseas, although generally the U.S. theatrical results drive the foreign box office. If a picture does not perform well in U.S. theaters, it normally makes all other theatrical and ancillary venues worth less money.

   The type of film and the stars often have a lot to do with these results. Certain U.S. television stars continually appear in movies of the week, for instance, because they have large followings in foreign markets. This fact does not mean that distributors will accept them in your feature films. Although much publicity has been given to day-and-date release of films into foreign at the same time (or occasionally even before) they are released domestically, it is a distribution method for tentpole films, not independents, to stem piracy.

4. Foreign ancillary revenue: Foreign ancillary presents a great opportunity. Television companies often buy exclusive product. In addition, markets have opened up in Eastern Europe and Asia. The studios have established their own distribution arms in India and China. The potential revenues for English-language films, even small ones, in other countries remain much stronger than for foreign-language films in the United States.
5. Total revenue: Total revenue is rentals plus domestic ancillary plus foreign equal total revenue. The foreign dollars are assumed to have the exhibitor portion removed and, therefore, can be added to the domestic dollars to find total revenue. Always be sure that you are comparing apples to apples.
6. Negative cost, prints and ads, and total costs: We have already discussed finding the production, or negative, costs of the film. These are not the total costs, however. Prints and ads are an important expense. It is necessary to include these costs to get a total profit picture. As films stay in distribution, the P&A costs grow. Therefore, if you are forecasting the initial release cost, indicate it. The most credible source for this type of information is still baseline.
7. Gross profit (loss): Gross profit (loss) equals the revenue minus the direct expenses before the company operating expenses. In this case, direct expenses are the negative and P&A costs. They relate directly to your film, as compared to the company overhead costs, which exist whether a film is in production or not. Notice the parentheses around the word loss. When preparing financial statements, use parentheses rather than minus signs to indicate negative numbers. Both words can be written on the profit line. However, if there isn’t a projected profit, you may want to rethink the whole idea.

What To Do With Those Pesky Numbers

Now we come to your films. Here are two guidelines for projecting your revenues. First, be conservative. The rule of thumb is to forecast your income on the low end and your expenses on the high end. Probably all filmmakers who have ever done a budget have padded it to be sure that they did not run out of money. You want to take the opposite path for revenues. If you are making a $500,000 gay-themed film, you would be fooling yourself to assume that the film will gross $83 million, as Oscar-nominated Brokeback Mountain did. It is nice to aspire to be an award winner, but you can’t plan on it.

Second, be honest. As long as the data of your historical films are as accurate as possible and the films you choose are comparable to those you plan to make, you should be all right. The comment made to me most often by distributors and investors is, “Tell them not to include My Big Fat Greek Wedding and Napoleon Dynamite as average films.” Feel free to discuss them in your analysis as an example of an exceptional result to hold out the brass ring as a hook for the investor. As long as you use those terms, you will be okay. You think I am being repetitive? You’re right. It is an important point.

Assumptions

Before seizing your calculator, you should write down your assumptions. Unless you have concrete reasons for the forecasted revenues in your tables, people may assume that you invented them. There has to be a thought process leading to these numbers. If you have just written 15 or 20 pages for the preceding sections, you have already gone through the thought process. In most cases, the crucial elements have already been mentioned, and the list is a recap for your benefit and for the investor’s. Do not expect readers to remember the specifics from the body of the business plan; this is not a game of hide and seek with the investor.

Explain your assumptions at the end of your Financing section, directly before the tables, to be sure that the reader knows how you came to your conclusions. If you do not do this, it may look like you have no rationale. Review the assumptions in the sample business plan before continuing.

Revenue and Expenses (Income Statement)

The Estimated Income Statement (Table 11.5 in Chapter 11), also known as the Statement of Revenues and Expenses, is the profit statement for the company as a whole. The sample shows a straightforward production company in which all the income is from films. If you are planning to produce other products, such as video, you will need several revenue lines to show each product separately. You should also provide separate assumptions and cash flows for those products because they function differently from film. Then make a combined statement that includes all the products.

Looking at the numbers, you can take the average or the median (the point above and below which half the films fall) of all the films, or you can give more weight to the more recent films. It depends on whether you feel that the genre is gaining more audience approval or has been drawing the same amount of boxoffice dollars for the past few years. You have to look at the available data and use good judgment.

Note that these tables show worldwide results. As you will not have these for the two most recent years, you want to include a table that shows the box office and budgets only for those years.

The net profit (loss) line is the sum of the company’s revenues and expenses. Commonly, the phrase “before taxes” is added to indicate that this is a preliminary income forecast. Do not let these phrases throw you. An accountant can easily prepare these statements for you.

Cash Flow Statement

A cash flow statement shows the timing of incoming revenue and outgoing cash. The dollars will not come in all in one week or one month. Table 11.6 shows a sample cash flow statement. Notice that in the columns for the table, I have used generic terms Year 1, Year 2, Year 3, and so on. If you are looking for the production money, your year starts when that money is in the bank. To specify the first year—for example, 2007—could create a problem. What if you are still wandering around two years later looking for money? Finding money is hard; no need to announce it to your current prospect.

In addition, each year is further divided into quarters. This seems to make the most sense for showing cash flow. However, you can use whole years. I would shy away from individual months. The format is hard to read and includes more detail than is necessary. Unless you have the distributor’s monthly accounts for various films in front of you, there is no way to track such data accurately.

In the sample cash flow statement, all of the production money is outgoing in Year 1. I have assumed one year from the beginning of production to the end of postproduction. If you are an experienced filmmaker, you may be able to shorten this time frame. Release of the film is scheduled for six months after the end of postproduction. No one really knows the actual timing in advance, even if you already have a distribution agreement in place. But we are using estimates, not promising a specific interval. Note there is the following comment at the bottom of the table: “For reference only. How and when monies are actually distributed depends on contract with distributor.”

The first rentals are shown during the quarter in which distribution begins. For this edition, we did a study on independent films in 2005. Most of them were in domestic theaters for six months or less, with a majority of the revenue returned in the first quarter. Track domestic grosses week to week to find trends in the number of theaters and the amount of grosses. Going through that exercise will reveal a pattern that you can use. Average release “windows” give you an idea of the money flow from other sources.

Again, not all films are released the same way. Some countries actually legislate the time period; in other cases, the distributor negotiates it. Trying to figure this out country by country would be excessive. The timing has been very fluid lately, so it is a good idea to research the topic to keep current. The films go into foreign release in the third quarter of Year 2, approximately seven months after the domestic release date. All the foreign revenues have been grouped into one category. The films go into domestic ancillary markets at the same time. The current release pattern is still video and pay-per-view, followed by other cable channels.

The total line is the sum of the incoming cash minus the outgoing cash. Because the production costs for the second film begin in the second year, production and P&A expenses appear as a deduction from the incoming cash flow. In a multi-picture company, the cash flow statement allows you to see whether you will have enough money coming in to keep production going. Do not panic over minus totals. The amount of eventual profit is the deciding factor.

The cumulative total is simply the sum of the totals from quarter to quarter, showing the position in profit and loss. These numbers represent the profits and losses from the films only. To keep the table simple for our purposes, the company overhead numbers have not been included; however, you need to include them for the overall company picture. In real life, ongoing costs that cannot be assigned to a specific picture must be included to show the company’s total cash position at any point in time.

Running a Company

An ongoing company has its past history to report, along with a statement of its present position. Your accountant will do the serious reports for you, such as Sources and Uses of Funds, Balance Sheet, and so on. These go into your Financial Planning section along with the other tables. As new companies have less to report, don’t worry. Just report what there is. There may or may not be a bank account worth mentioning. Present information that must be included in the business plan, even for a very small company.

Administrative (Overhead) Expenses

If you are setting up a company, you will have ongoing expenses, far less than those of the studios, of course. These general administrative costs include salaries that are not attributable to a specific film budget as well as all of the company’s tools of the trade—office equipment, telephone charges, entertainment costs, and so on. Your company may have fewer people or no salaried employees at all. Before Year 1, there are generally start-up expenses. You may rent an office, option a script, buy a computer, or scout locations in the Dardanelles. Any expenses that are necessary to get your company going are shown in this table. Even if you wait for investment funds before doing any start-up, list these costs separately. Some of them—like the computer—are one-time costs.

Like everything else, administrative costs are projected over the time period of the business plan. Look ahead to the number of films that you plan to make three or four years down the road. You may need additional office staff, more office space, or increased development money. Everyone knows that these numbers are guesstimates; however, as a general rule, you should include all the expenses you can think of. On the other hand, do not give yourself a salary of $1 million. I see this item in a lot of companies that never get funded. Because you are partners with the investor, your salary should be moderate.

What If I Have Only One Film?

Sometimes people are confused about the sample business plan in Chapter 11, which uses three films, because they only have one film. As a filmmaker (producer, director), you are the manager of a small company. The difference is that you will be able to charge all of your expenses to the film. Don’t overburden this poor film with your car and house payments. Include only those things that belong in a film budget.

The layout is the same for one film as for multiple films, but fortunately you have less number crunching. Your first table will be comparative films for the past three years (or four if you need them) for which you have worldwide numbers. Your second table will be the two years for which you only have U.S. box office and budgets. Then you have an income statement (without the overhead) and a cash flow statement, which will be similar to any of the individual films in the sample business plan.

The Next Step

Review Chapter 1, “Executive Summary,” then study the sample business plan in Chapter 11. Then work through the sample on the accompanying CD. Feel free to use this format as a guide in writing your own plan.

Have fun, and good luck!