BUDGETS AND FINANCE

BUDGETS

A typical budget is broken down by line items. Each line item represents a different thing that the production will have to pay for. Traditionally, feature film budgets are divided into two sections, above the line and below the line. Above the line costs include writer’s salaries, story rights, producer’s fees, director’s fees, talent salaries and miscellaneous related expenses.

The below the line section of the budget is usually broken down into production, post-production and distribution. Production items include the production staff, extras, the art department (set design, set construction, set dressing, and props), wardrobe, make-up and hair, the camera department (electrical, lighting and camera), the production sound department, special effects, location expenses, transportation, overtime and film and tape stock.

The post-production portion includes the editorial department, the sound department, the visual effects department, music rights, music composition and scoring, film laboratory costs, post-production facility costs, sound facility costs, film, videotape and audio stock.

The distribution section includes publicity, film prints, video tape duplication and other costs of distributing the project. In additions, budgets are further broken down into departments. Traditional film departments include the camera department, editorial, and sound, to name only a few. At the department level, you¹ll find line items for crew, equipment and other expenses.

ACCOUNTING

Traditionally, the large studios use Hollywood accounting to distribute profits earned on a mega hit movie to corporate entities which are typically owned by the same people. This has the net result of reducing the project's reported profit by a substantial margin, sometimes even eliminating it altogether. Although this may be for income tax purposes, it is often used to reduce the amount which the studios must pay in royalties or other profit-sharing agreements.

Since we deal only with independent movies, our goal is to get the investors the maximum return for their investment. We recognize the risk that investors take and know that they will return if they invest in profitable projects.

We look over every budget and try to determine whether overhead charges are reasonable:

• Production overhead - a lump sum assigned by the studio to support a motion picture project
• Distribution overhead - a negotiated amount with a film distributor who will distribute the picture to various local and international markets including theatre, DVD, television and airlines
• Marketing overhead - a lump sum to promote the picture in ads, posters, events, festivals and the like

Obviously, the best goal is to make a picture and sell it to a distributor for a fixed amount. This way, the film maker locks in his/her profits. Unfortunately, if the movie becomes a mega hit the film maker and investors may have left money on the table.

FINANCE

Skyrocketing costs in Hollywood coupled with a decline in the movie-going public have made the standard studio business model a difficult proposition. In the wake of that, smaller production companies are rising up and creating entertainment for a fraction of the cost of the major studios. Many of these films will be released theatrically; others will be sold direct to video. Some will win awards at film festivals. Still others will never find a home anywhere.

These independent films can have budgets as low as $250,000, and can extend into budgets that rival studio films. A typical film targeted for direct to video release can run in the range of $300,000 - $500,000; theatrical releases can start that low, but often will be at least one or two million dollars.

How well these films do financially depends a large part on how they are distributed. Most feature length motion pictures will find a distributor that will at least distribute a direct-to-video release of the picture. This deal can take many forms. The distributor may offer a small sum up front with a split of the distributor's profits, or the distributor may offer a large lump sum to cover the film's budget, and then offer a split of the profits, or the distributor may offer a deal that is exclusively profit sharing. In any of these cases, the profit sharing is usually in the range of 40% to the production company and 60% to the distributor.

The distributor's profits come from the receipts from the viewing public. A film that has a theatrical release generally has a 50-50 split of the box office receipts. Video sales carry a similar split. So, a film with a $2 million budget will need to gross $8 million to break even. Obviously, smaller budgets will not need to earn as much, and larger budgets will need to earn more.