How to Budget a Film Production
Every film, TV and commercial producer knows that shooting internationally can sometimes be an attractive option. Many international locations offer tax advantages and favorable currency exchange rates.
But with currencies constantly fluctuating in value, a currency that appears inexpensive at the time a project is budgeted can become much more expensive by the time shooting begins.
“A common mistake that producers make is choosing a highly optimistic exchange rate when bidding on a foreign production project," said Tomoko Iwakawa, a senior foreign exchange advisor at City National Bank who is familiar with helping production companies choose the currency rate at which they will build their budgets when bidding on a project.
“Bidders used to go online and use today's exchange rate to bid on a project, such as a commercial. They would win the job, and then the rates would be very different by the time they performed the job, which could result in diminished profits or losing money," she said.
But bidding on international commercial projects or planning international TV and film productions doesn't have to be a shot in the dark. Foreign exchange advisors can provide insight to help producers budget future projects effectively and develop a foreign currency strategy that will allow them to maximize their production budgets.
Because only about 25 percent of commercials are shot overseas, many commercial production companies have limited experience managing foreign exchange rates. With short time frames and highly competitive bidding for each commercial project, the process may be stressful. But the foreign exchange rate doesn't have to cause additional stress.
FX advisors like Iwakawa study exchange rate fluctuations on a daily basis and digest factors that point to upcoming changes for particular currencies. With their insight, commercial producers can build more reliable budgets that will hold up even if production doesn't take place for several weeks or months.
For instance, imagine that a major automotive manufacturer wants to shoot a commercial in New Zealand. As soon as the project is announced, commercial production companies are scrambling to create budgets to bid on it. Those who simply look online at current currency rates and use those figures in their budgets are taking on unnecessary risk.
Producers who base their budgets on currency rates that are forecast for the actual production period are more likely to realize the profits they expect.
For this reason, it is best to get professional advice during the bidding process.
Bid Rate Sheets
Financial service providers that are experienced in the entertainment industry also can help producers budget accordingly.
For instance, City National's FX team sends out a weekly "Bid Rate sheet" for commercial producers. The email provides indicative bidding rates for projects occurring in 6 to 12 weeks, for 20 different currencies, including quite a few exotic currencies, as these countries are occasionally cheaper to shoot in.
“We share the safe budget rate for bidding on projects in each of those currencies, along with commentary about why, watching how the dollar is tracking in comparison to the local currency in each destination," Iwakawa said.
That determination depends on several factors, including the currency's liquidity rate and volatility. Such a rate forecast can help commercial producers quickly decide which figures to use in their proposals.
“If the currency is expected to increase in the next six months and the commercial will be produced during that time frame, you also need to pad your budget so you won't lose money by the time the commercial is produced," Iwakawa said.
Navigating the Padded Rate
Forecasting reliable currency rates isn't the only way an FX advisor can help production companies. A successful bid on a commercial means the production company must quickly figure out the best way to maximize its budget and acquire the equipment and resources needed at favorable exchange rates.
“Frequently, once the client wins the job, he or she will call me," Iwakawa said. “I advise them on how to move forward with the padded rate."
For instance, a small commercial production client recently used the padded rate Iwakawa recommended and won a job to be shot in Europe. Because the currency was still in his favor, Iwakawa advised him to open a euro account. The client placed orders for all the equipment and supplies he would need for the commercial, opened a euro account and funded it with converted currency. As a result, he had the funds already converted and ready to spend when he needed to pay for equipment and other production items.
"The EUR started rising shortly thereafter, and this small company was able to save quite a bit of money," said Iwakawa.
That's a typical process for smaller businesses, but for large commercial production companies, Iwakawa often recommends establishing a foreign exchange credit line.
“If they win a bid on a euro and rates are in their favor, instead of buying all the euros and putting them in the account, they can enter into a forward contract, verbally agreeing on a future exchange rate based on today's rate," she said.
In that case, if the forward rate is cheaper than the budgeted rate, the bank is taking the credit risk but offsetting it against the forward rate. As a result, the production company is not only able to eliminate its FX risk, but also able to make a slight FX gain.
This second approach is preferable, Iwakawa said, but it requires a client to establish a foreign exchange credit line. And if a company isn't extremely active overseas, they may not have one in time for the project to shoot.
Television & Film Production
Managing exchange rates when producing commercials is quite different from doing so for TV and film productions.
While commercial production involves short time frames and fiercely competitive bidding, there are not as many companies vying to take on TV and film productions.
TV and film projects require larger production teams and, because their projects are longer term, TV and film companies are more accustomed to padding their budgets for foreign exchange risk, Iwakawa said.
“With TV, hedging is typically done with the bank that provides the loan at a specific budget rate," Iwakawa said. “The best approach is to lock in everything forwards upfront. Doing that requires a line of credit, which requires a TV production company to present its financials."
In the film industry, the bank that lends the money for film production also handles the foreign exchange, Iwakawa said. In many cases, the bank will have hedging requirements, such as requiring the client to hedge at least 50 percent of FX.
Though TV and film differ from commercial production, they still can benefit from FX insight.
For instance, when a TV production client was shooting in Korea recently, Iwakawa told them she thought the Korean won could strengthen, advising them to hedge forward. The company was not able to take her advice, and “unfortunately it's costing them more," she said.
However, because TV projects take longer to complete than commercials, and because large TV production companies often shoot in multiple locations, there are more opportunities to spread the risk around and make up for losses.
“So while this company lost money in Korea, they are trying to make up for it by saving money on Canadian shoots," Iwakawa said.
Working With a Financial Partner
When production companies are shooting overseas, an expert financial partner can help them with more than just the exchange rate. Many production companies need working capital in the form of loans or lines of credit, as well as FX services, if they shoot abroad.
They also may need equipment financing or equipment leasing, and a bank that is familiar with the industry, Iwakawa said.
Regardless of the financial services a production company may need, a financial partner can be more effective if they understand the entire financial impact of the project. That is, if a production company is shooting in Canada and will receive tax rebates many months after production, the advisor needs to know about that.
“You don't want to be hit on the buy and the sell," Iwakawa said. “If you'll get a tax rebate in a year or so, that's good to know because it will affect parameters when you try to quantify the risk. If you allow the advisor to get to know your full cash flow from beginning to end, they can advise on a holistic level rather than piecemeal."
By relying on experts to help determine the correct exchange rate for budgeting projects, and providing detailed information to advisors about a project's entire financial impact, production companies can make more informed decisions and protect their profit margins.
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