I wanted to share with you a presentation about Where The Money Goes that is received from making video games. I made this presentation a few years ago to a game development studio I was running at the time and I believe everyone found it useful and gained a better understanding of where the money that comes into the business goes before it pays their wages and why ‘when’ it comes in is important too. I’ve updated this post since then with more up-to-date principles, information and costs as I learn new things ever day.
These are general principles that apply to any business and I’m going to cover the basics to hold on tight, feel free to ask me any questions in the comments section.
Breaking out where the money goes
My initial motivation for writing this post was to answer a question I’d long since asked myself when I was starting out: “Why do I get paid so little when the business is getting lots of money?”. I wanted to help people understand what the business spent its money on before they got their wages. I appreciate that everyone wasn’t stupid and just thought that 100% of the money coming in went straight to wages but I think there were various pieces of the pie missing.
I’ll start with an example pie chart that includes typical costs that are taken out of revenue fees received for development of a game for a mid-size UK studio containing about 35 staff or more. Again, these are typical but vary depending on the nature of your business.
Let’s walk through the components of this example:
- Wages - this is the gross salary you receive before tax and national insurance costs are taken off
- Corporate NIC - These are the National Insurance contributions a UK business makes in addition to the NI payments you make yourself
- Benefits - this is a general roll up for things such as bonus, pensions, healthcare, time-off in lieu and a myriad of other things
- Recruitment - this is the money the company pays to the recruitment agency that got you the job and I’ve chosen a figure I think is typical. It’s typically a one-off payment made when you pass your probation period. This figure obviously varies massively depending on the deal your employer has and may not even exist if you applied direct.
We then have 2 more figures that scale with your business but we’ll assume that they apply in a linear fashion for this example
- Business Costs - this figure of 40% is typical and includes a whole host of costs that I’ll go into later. Needless to say that if there’s only 1 of you then it’s going to be 100% cost against your salary.
- Platform Fee - many platforms such as Apple, Sony, Microsoft all take 30% of the revenue received as a platform fee. It’s a way for them to recoup the costs of developer support, administration, marketing and whatever else they consider worthy. I’ve taken this 30% and applied it directly to your salary as a ‘tax’ to show the amount of money required to pay your wages.
Using these figures, your salary comes in at 39% of gross revenue, i.e., for every £1 you earn the game needs to earn £2.55.
Lets take an array of price points a game may sell at to find out how many games you’d need to sell for you to get £1 and also an example salary of £36,000.
Unit Sales to get your £1
Unit Sales to get £36k salary
As we can see, if let unchecked typical business costs could easily career out of control and result in a game never breaking even.
Of course not every studio is like this so lets take a further example of a ‘lean studio’ where all the costs are as thin as possible and I’d assume this is typical of a micro or nano studio of employees, not self-employed people.
Blitzing through the points about we get to a salary taking up 59% of the revenue or in other words for every £1 you earn the game needs to earn £1.72. This figure is obviously much lower because all the costs have been stripped out.
Again, using the same format as before we can arrive at some figures for how many units you’d need to sell to break-even and get your money back.
£39.99 0.04 1,545
£19.99 0.09 3,090
£9.99 0.17 6,184
£4.99 0.34 12,380
£1.99 0.86 31,043
£0.59 2.91 104,705 —————– ——————————- ———————————–
Stripping away the costs obviously means you need to sell fewer games to get the same amount of cash in your pocket at the end of the day.
I know I keep saying this but there are so many variables at play and they apply to different components at different rates and these are indicative numbers only but it doesn’t take long to get these figures for any game, studio or business and I have a myriad of tools to capture and expose these costs as well as work out what the break-even unit sales and costs are for numerous platforms.
E.g., How many units of a game would you need to sell on iPhone to break-even?
There’s a large chunk of they money that goes into a mysterious pot called ‘business costs’ and this little section includes everything that the business pays for outside of salary costs. Lets take a look at a list of the obvious ones:
First, lets take a look through some typical costs that come in at the project level and are duplicated for every project the studio undertakes:
- I.T. Rentals - this is the cost of the hardware & software you use every day to make the game: desktop machines, laptops, monitors, dev kits, art packages, IDEs, etc.
- Middleware - if you use any licensed software such as Unreal, Unity, Scaleform, SpeedTree or anything else like this.
- Outsourcing: Art, Anim, Audio - these are other costs for the work done by people outside of your studio
- QA - engaging people to test your game costs money, whether it be £50 to your friend or employing 100+ people to get your game from Alpha to Master
- Materials - all the other bits & pieces you consume: blank media, pens, paper, ink for the printer, books, reference games, etc.
- Travel - travel to see publishers, marketing events or trade shows all costs money.
- Training - now you’re at the event you probably need a ticket to get in, or maybe a specific training course
- Subsistence - maybe you’re old skool and get some Pizzas in during crunch, maybe you like to take the team out on occasion or even just a Christmas party.
- Agent fees - some companies use agents to help them get their games signed up to publishers and deals are typically based on a percentage of gross revenue and 10% is a typical value.
Secondly, the studio itself costs money to run if you’re making 20 games or even if you’re not making any games at all!
- Office space - the space itself costs money to rent, plus there’s local taxes, insurance and all sorts of maintenance you’ll be needing
- Utilities - internet, electric, water and the air-con for your server room need to keep on being delivered for you to keep going
- Equipment - desks, chairs, servers, shelves, whiteboards,
- Management - larger studios have people who don’t actually make the games on the front line but are still there and for corporations these include people you’ll probably never see including CEOs, Studio Managers, Production, IT, Office Admin, Finance, Marketing, etc.
- Sales - The studio needs to sell both itself and it’s games with personal visits, trade show attendance and maybe adverts in trade magazines for recruitment.
- Events – Does your studio have events to celebrate key milestones being passed? Summer Events? Christmas Parties?
- Legal & Finance - Maybe you need to use accountants to run through your figures or audit your returns? Business contracts need a valid legal pass over them that usually involves engaging a specialised lawyer. If you’re working on long international contracts then maybe you need to dabble in Forward Exchange rates?
- Miscellaneous - There’s a myriad of small costs such as postage, blackberry fees, free fruit, etc.
Tick All That Apply
The items listed above are ones I typically find and look for in a games business but just like us, they’re all very unique and the costs vary wildly and in some cases may not apply at all depending on how the business is setup.
When The Money Comes In
So far we’ve covered a broad range of topics about where the money goes so lets work through some examples of When The Money Comes In as this is critical for any business, whether you’re making games or anything else.
In my experience, the lack of understanding and focus on Cash Flow is what kills businesses very quickly and is particularly important for Work For Hire studios who rely on doing work and getting paid for it so they can in turn pay their bills.
Here’s an example timeline for a work-for-hire studio when they send their milestone after spending 1 month working on it and considering typical contracted dates for payment terms that happens in an ideal world. The reality is that these dates slip on both sides but we’ll cover that later.
We can see that it can be typically at least 45 days before any payment is received and for those paying attention this is after your next monthly salary run. Even in an idealistic world, this causes strains on the businesses cash flow.
-30 Milestone 1 work in progress for 30 calendar days
0 MS 1 Submitted on this date starting a chain of events
15 MS 1 approved, purchase order raised & invoiced
30 MS 2 Submitted
45 MS 1 Revenue received MS 2 Approved
60 MS 3 Submitted
75 MS 2 Revenue received MS 3 Approved ———- —————————————————————————————————————————————————————————————————————————
I’m sure you can imagine the cascading effect of slipping dates anywhere in here: slipped delivery, delayed approval or late payment can all bring a business to it’s knees very quickly.
Diving a little deeper we can see the effect of delaying revenue by 1 month on a business that’s expecting consistent monthly revenue.
Here’s what this example should look like where the money is received consistently, no slips, no delays and everything is perfect.
Revenue Costs Net Profit Acc Profit ———— ————- ————- ————- ————-
Now lets take this and delay 1 of the payments by 1 month and we can see the dramatic effect this has on the business as it’s forced to support all the costs without any money in the bank to do so.
This is what happens when Milestones slip by 1 month and I’m sure you can imagine what happens if this keeps slipping and slipping with the studio incurring more costs with no more revenue coming in, just the figure that was promised. If the studio doesn’t have enough cash in the bank then this could be fatal.
Revenue Costs Net Profit Acc. Profit ————- ————- ————————————————– ————- ————-
Taking a slightly different view we can see the effect of the project costs increasing in Month 1 resulting in the studio spending all it’s money just paying the bills. Since the profit isn’t increasing the buffer isn’t building up so if there’s any late delivery then it’s curtains for the project and it could be for the studio.
This can happen when the team size increased to cope with late delivery or scope increases without a corresponding increase in the revenues.
Revenue Costs Net Profit Acc. Profit ————- ————- ————- ————- ————-
I believe I’ve said this a few times by now but business costs can vary immensely depending on the structure of your business and the working relationships you have with your partners.
Being predictable and reliable is a core part of running a business as it’s easier to deal with issues if you can expect them upfront and I believe this is a critical skill for good business managers to have.
This predictability becomes absolutely key if you work within a listed company as this is typically more important than making a profit or a loss; anticipating this, communicating it and hitting the expectations is how these companies become successful. Amazingly, if you predict or are expected to make a loss and then you make a profit this can be potentially bad as it means you don’t have a good grasp on your business. The city is a complex area and people can make money even if you lose, hitting expectations is key.
Growing your business and having a large volume of work brings with it an economy of scale as the fixed costs of running the projects is spread across a larger revenue stream. However, large volumes of work also need more effort and support so it’s a matter of getting the balance right and choosing a level that you’re comfortable with.
Making profit isn’t just about buying yourself a Ferrari, although that could happen one day. Your business will probably need the banked profit some day to get through an inevitable sticky patch.
Profitability also brings with it more flexibility in what you do as you can afford to speculate and take risks on projects that may be even more profitable for you but it’s no great loss if you end up breaking even.
I’ve covered a lot of finance related topics at a very high level in this post and there’s obviously more too it than a simple blog post can cover but I believe it’s a great introduction to the business that pays many of our wages.
Not everyone wants to run an ever expanding studio as the size incurs it’s own increasing risks and stress to go with it. Striking a balance you’re happy with is important, for some it’s a 1-man game making games in their study and this low overhead, low turnover business can actually reap more financial rewards let alone making the owner very happy that they are in total control of their own destiny and lifestyle.
I’ll spare you the details of the more complex areas of corporate finance including EBITDAR, COGS, SG&A, CAPEX, gearing and leverage but feel free to ask.
I hope you’ve found this useful and I welcome any questions in the comments section and I’ll answer what I can.
How Does Your Business Tick?
I’d love to hear your experiences and get an understanding for what makes all of your businesses tick, why not drop a post in the comments section?