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The world of film financing is complex. While it’s a critical component of professional filmmaking, it can be a challenge just to get your bearings, much less learn how to navigate its murky depths for yourself.
In this post, we’re going to give you a helping hand with our overview of fundamental financing concepts for film. Below, we’ll explore many of the common terms you’ll encounter while putting together the funds for your next movie.
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Before you move onto the rest of this post, take a moment to bookmark some of our film financing resources.
For instance, dive into our podcast series On Production that digs into the world of production with industry leaders and experts. Here’s a recent episode in which we sit down with David Offenberg to talk about the evolving landscape of indie film financing and the shifting dynamics of streaming services.
Additionally, keep an eye on Wrapbook’s resource center for our expanding library of production-related templates, eBooks, upcoming virtual events, webinar on-demand recordings, and more.
Now, let’s jump into our list of fundamental financing concepts for film.
Learning how to budget is perhaps the most fundamental concept in financing for motion pictures and television. Budgeting is the process of cost estimation that determines approximately how much money it will take to produce your project.
In other words, it’s like putting a price tag on your movie. Without a well-built budget, you won’t know how much funding you’ll need to raise in order to make it.
Note, however, that budgeting is not a one-size-fits-all discipline. Just as movies come in all shapes and sizes, so do the budgets that drive their production. If your project features significant VFX costs or needs to jump to a new IATSE tier, then you’ll need to scale and sculpt your budget to reflect those unique conditions.
Cash flow refers to the movement of money into and out of a production or production company’s bank accounts over time. In pragmatic terms, it’s the practice of making sure you have all the money you need when you actually need it.
A production’s ability to manage its cash flow is central to its financial operations. It ensures that the production can pay its costs on time and keep moving forward on schedule. Poor cash flow, by contrast, can create an existential risk. Extreme cash flow emergencies can force productions into unnecessary debt incursion or even bring entire shoots to a screeching halt.
Contingencies are essentially risks. The term refers to events that are possible but not certain. Therefore, contingency planning is the process of preparing for possible outcomes before those outcomes actually occur.
Contingency planning is an essential component of risk management. It’s much easier to handle a major problem when you already have a plan for doing so in place.
In terms of financing concepts for film, contingency planning is an important part of budgeting and fundraising responsibly. It’s generally a matter of setting aside a certain portion of your budget to cover a reasonable level of unexpected costs.
Production delays, for example, are costly and undesirable but not tremendously rare. If a sudden delay occurs, proper contingency planning can mean the difference between a minor inconvenience and a major financial emergency.
Due diligence refers to the reasonable level of attention and effort that a person or company should devote to understanding or solving any issue of interest. To illustrate, consider the concept in terms of set safety.
On set, due diligence might mean holding a safety meeting, hiring a medic, or keeping a fire extinguisher on standby. The specific steps taken will change from situation to situation, but the idea remains the same. While you can’t prevent every accident from happening, you can do your due diligence and take reasonable steps to minimize danger.
As a financing concept, due diligence often boils down to thorough research. Productions must perform due diligence on any investors or other financial stakeholders to ensure their credibility and reliability. A failure to conduct research at the right depth could result in fraud or an unexpected lapse in funding.
A film financing model is any planned method of leveraging financial tools and monetary sources to fund a project. It can refer to any combination of a wide variety of individual financing structures, like pre-sales, gap financing, or private equity.
Film financing models evolve constantly. The industry is always looking for new, more efficient, and more profitable ways to finance motion pictures. Innovations like product placement and crowdfunding, for example, uniquely shift the balance of both fiscal responsibility and reward.
A film’s valuation is an approximate measure of its financial worth in the current market and over time. This number can be based on many factors, including market demand and projected costs of production. A film’s valuation is often used to lure investors or secure other forms of financing.
Film valuation is notoriously unpredictable, particularly in the worlds of medium and low budget filmmaking. While major studio blockbusters can generally construct accurate projections based on testing and the value of attached intellectual property, indie films are often less anchored to reliable sales numbers. The result is a corner of the industry that regularly produces both box office bombs and unexpected breakout hits, such as The Blair Witch Project or Moon.
Negotiation is the process by which two parties reach an agreement. Whether you’re navigating client expectations or deciding where to eat with your family, negotiation is a part of daily life.
However, when it comes to financing a movie, negotiation skills are not just a casual affair. They represent an existential concern for beginner and veteran producers alike.
In order for your film to be a financial success, it is imperative that the producer be able to negotiate effectively. It’s the only way to secure favorable deals and protect your financial interests.
Your recoupment strategy is a plan for how your project will earn back any money that was borrowed or otherwise provided as financing. It is a working theory for how your investors will recoup their investments.
In the film industry, recoupment strategies typically revolve around some form of revenue or profit sharing. The exact terms can vary dramatically from contract to contract, even among different investors on the same project.
A return on investment, commonly abbreviated as ROI, refers to a projected or actual financial return that an investor can expect to receive over time. As a concept, it’s directly connected to a project’s valuation and recoupment strategy, both as referenced above.
ROI is a critical component of any investor’s calculations. A higher ROI is almost always better, but the details of an acceptable ROI may vary according to an individual investor’s priorities.
For example, a relatively low but virtually guaranteed return might appeal to one investor who sees themselves as risk averse, while a huge but highly uncertain return might appeal to an investor with more speculative motives.
A revenue stream is any expected source of income for a project. That might include the traditional revenue of box office sales, but it could also include distribution deals, merchandising, product placement, or other brand partnerships.
In general, the existence of multiple revenue streams is a good sign for a project’s financial outlook. Ticket sales at the box office can lead to massive profits, but they’re also unpredictable. Multiple revenue streams can create stability that makes financial success more easily obtainable.
Risk assessment is a collection of practices designed to evaluate the level of potential hazard associated with a given project or production. Part of risk assessment is physical by nature. For instance, if your shoot will heavily feature the work of stunt drivers, your level of physical risk will increase. This may, in turn, affect the costs of budget items like production insurance.
However, there is also a purely financial component to risk assessment.
There are many reasons why a project could be considered either a more risky or less risky investment. High costs or the significant possibility for production delays might increase the project’s risk level, while the inclusion of A-list talent or the attachment of high-profile IP might decrease the level of financial risk. In any case, adequate risk assessment provides financial stakeholders with crucial information about investments and a project’s potential long-term profitability.
Collateral refers to any asset that a producer might use to secure a loan or other transactional form of financing. Securing collateral is the practice of determining ownership of collateral and offering it in exchange for the guarantee of the loan or investment.
In theory, producers could use almost anything as collateral, provided that it has value. In practice, however, collateral is genuinely related to some element of ownership or profit-sharing related to the project or associated production company. Distribution rights, for example, are commonly traded in exchange for a portion of a production’s total funding.
Financing for film is a huge topic, but the terms above can form a gateway to further questions and education. Don’t forget to dive into Wrapbook’s resource center for more essential learning tools, like our eBooks and digital events.
If you’re financing your own project, don’t miss our essential guide to film financing or our deep dive into securing gap financing.
At Wrapbook, we pride ourselves on providing outstanding free resources to producers and their crews, but this post is for informational purposes only as of the date above. The content on our website is not intended to provide and should not be relied on for legal, accounting, or tax advice. You should consult with your own legal, accounting, or tax advisors to determine how this general information may apply to your specific circumstances.
Loring is a Los Angeles-based writer, director, and creative producer. His work has been commissioned by a diverse range of clients- from Havas Worldwide to Wisecrack, inc.- and has been screened around the world. Through a background that blends project development with physical production across multiple formats, Loring has developed a uniquely eclectic skillset as a visual storyteller.
