Lessons

Lesson Info

Product Profitability

So let's get right into it uh this is a chart finally uh this is a chart of my sweetmeats business uh I started it in two thousand four but as you'll see this chart only starts in two thousand six because I wasn't keeping track of my uh bookkeeping for the first year and a half uh because like I said I was doing this on the side I had a job at the time and I thought well this is all just bonus whatever I have in my bank account is free for me to play with and that's great uh but I don't really need to keep track of anything I wasn't serious about my business uh when I decided that I wanted to make that business my actual living I had to get serious uh so then I started in two thousand six was when I took my first book keeping class and I started actually keeping track of all this stuff um you'll see the light green is income over those eight years and then the darker green is profit uh and in comparison the prophet is not super big um the profit is you know what you're able to I work w...

ith at the end of the day it's it's not just what you can take home to pay your personal bills with it's also the money that you have to reinvest in your business for the future and help it to grow um so when you take all of that into account like I mentioned in part one uh this worked out to about two dollars an hour in the beginning if you look in these these first couple of years this prophet here this sad little profit was getting me about two two bucks an hour so, um not the way that I wanted to be living probably not the way that any of you would like to be living um that's not even any minimum wage uh and people ask me all the time you know, well, what should my profit be the first year? What should it look like the second year? Uh and you know, to the first three years of your business it makes sense to continue investing in that business and helping it grow and your profit is not as important as later on when you want that business to become sustainable and start having things roll a little more smoothly going forward. So, uh, a situation that I see a lot is that, uh, businesses lose money especially sort of uh one person creative businesses where they're doing everything themselves they don't have to rely on a lot of initial upfront investment or um, you know, building a space or a factory or a store um very often I see the first year uh crafters are not profitable it all the second year they're about break even and then the third year they start to see some profit um but they start to see some profit they may start to see that like two dollars an hour level profit um so the big takeaway there is if you're thinking of starting a business uh you probably don't want to do what I did and have something going on the side and then immediately think to yourself well if I have this on the side and I start doing this full time then absolutely I can grow my revenue in my profit you know, hand over fist because it's all I'll be devoting my time to um you want to look at this as a nice slow steady progression um it's very rare and not necessarily good for your business to become an overnight success um it's very difficult to manage that and it's actually one of the top reasons businesses fail is because they grow too fast they don't have enough on hand they don't have enough money to work with us so you get a huge order um that you want to fulfill suddenly I don't know your your crafts get picked up by uh the new york times or they get shown on the martha stewart show or something and um suddenly you know huge stores are placing orders for hundreds or even thousands of pieces for multiple locations uh and you don't have cash in the bank to fill that like you can't even hire the people and by enough materials to fulfill that order um and then suddenly where are you? You know you've got half an order, maybe you're out of cash, you've got an unhappy customer and then it becomes kind of a sad story even though you've become suddenly very popular, so slow and steady is is the way to go, um but it means you have to prepare for that, right? Um, it means that you need to either be slowly ramping down your day job as you're ramping up your business, which I know not everybody can do not everybody has that luxury. Um if not, it means, you know, making sure that you have enough saved at the outset that you can cover your expenses, both your business and your personal expenses for those first few years, at least until things really get rolling. So let's talk a little more about different kinds of profit because we're going to track different ways of looking at profit. You've got gross profit, which is your total income every thing that you've got coming in all the money, all the revenue minus your cost of goods sold this is just if you're not taking any of your time into account, you're not taking any of your other business is business expenses into account this is your gross profit um if you're not even gross profitable you have a big problem it means that your materials and your production our outstripping uh the income that you're making from those products it means that the stuff that you're selling is way too expensive to make just bottom line uh, so you'll need to cut back on either the amount of time that it takes or, uh, the cost of your materials something and then you have net profit, which is your income minus your total expenses, so that also takes into consideration the cost of having the lights on the cost of your business cards and your website and everything that doesn't include that cost of goods sold category that category of expenses that just goes into making your products um in order for your business to actually be considered a business, it needs to have eventually some sustained profit if you don't if your business is not profitable or if it's very erratically profitable um it technically becomes a hobby or a hobby business uh here in the u s for tax purposes that has some implications. Um if you have a hobby business, you won't be able to deduct any more than you take in from that business you won't be able to offset any other income that you make if you have a side job right now um along with your craft business and your craft business especially in the first couple of years is not profitable um which is totally fine and everybody understands that including the tax authority including the irs uh those deductions khun b usedto offset the income that you make from that day job uh which is great but if you have your business for five years six years and you've only shown a profit for one or two out of those five or six years uh not only is that not great for you as a business person but the tax man will start getting suspicious as well uh because there are plenty of people who decide to declare that they have a business just to pay less on their tax is right and as I uh let you know in part one I'm not a huge fan of cheating on your taxes it's not legal so I don't recommend it for that reason but taxes also pay for things that we all need and use like buses and streetlights in schools in that sort of thing um there's a reason we have them any questions about this general notion of profit and when to turn a profit and how important it is to be profitable at what stage in your business? Well all the people just spot it on the graft your profit have gone down considerably people were curious about that we're gonna go back to that so in my personal story you can see exactly where I was in my life by this graph um let's go back to a little later but let's do it now so two thousand four I started my business uh you would see the prophet and the income be underneath this line it would be negative number um two thousand seven from two thousand six two thousand seven things ramped up considerably uh many of you will who have been doing this for a while we'll remember that around this period from about two thousand three two thousand four to two thousand seven two thousand eight was like the indie craft gold rush right at sea was started in two thousand five um this is around when all the big craft fairs got started the bazaar bizarre renegade um all the ones that you know have multiple locations now around the country uh this is when I was going to craft fairs and selling out halfway through the first day people would even by my misprints and like stuff I hadn't finished making I mean, it was crazy it was nuts what people were shelling out their money for um this was pre recession so everyone had lots of disposable income and like indy craft was just the whole world of it was so trendy and so exciting for so many people uh it was, you know, a whole boom town thing um two thousand and I so I quit my day job in two thousand and seven and then really ramp things up up through two thousand nine um spent a lot more time on my business started uh actually doing my bookkeeping and trying to figure some things out there uh and then you know, right around here is where the bottom fell out for a lot of people um in my household, my husband I lost a lot of clients, a lot of of consulting clients so in order to keep things, uh, really even in predictable because my business was not even in predictable or that profitable yet um in two thousand ten, I went back and got a part time day job so that I could do that for half the week and make sure I was covering my expenses and then spend the other half the week uh, on my crafting business. Um and then the sweetmeats sort of reached the end of their life as a trend. Um, so many of you, I'm sure have been cognizant of trends in the craft industry. There was the whole life portlandia joke put a bird on it where everything in the beginning had a bird on it. Um now I think it's put a moustache on it, right? Even that has sort of fallen away um that's sort of over um I was making these plush meets before there was a meet trend but then the whole bacon thing started and so of course I added a bacon to my line because why wouldn't you uh and then I started to see that this was becoming a really big popular thing and I thought ok, once a trend hits mainstream like that's it that's the death knell this is going to start going the way of the dinosaur pretty soon um so I decided to limit at that point the amount of the sweet meats that I was making and selling um and I using my bookkeeping was able to figure out you know, if I expect sales of these things to decline whatever it was say thirty percent a year from this you know, apex like this is the bacon trend is hugely popular right now it's probably not going to get any better than this for these sweetmeats let's assume thirty percent less interest over the year how many of these joining to have in stock then too sell out of them and not have a bunch sitting you know, in storage somewhere while still not running out too soon? And so that was something really useful that I was able to take away from the bookkeeping to see well, okay in you know, two thousand nine, two thousand ten this is how many I sold during those years, um, this is how many I have left an inventory. Um, this is how many I will need to buy of each one of my items in order to fill that out for the remainder of time, for my business. Um, and I actually it worked. I did a really good job I managed to sell out of all of those sweet meats by twenty thirteen. Um, all at roughly the same time, I had seven different styles at that point. Um, and I mention, sell them all out at about the same time, and people will still occasionally seo, can I buy one of those hands? Can I buy a steak? Whatever, and no, I don't have them anymore. I close that business down because I saw that, you know, even with a lot of marketing efforts, even with a lot of work on my part, it just wasn't ever really going to take off again because that trend had appeared and then sort of dissipated. Um, so I occasionally get requests still for the meats, but I know that we're I selling them today. I'd be right back down to this level and that's not worth my time, that's not how I want to spend my time, uh, and frankly, there's you know new things that I want to try did those meats for eight years I want to make something else s so I've been doing a lot of um so I have that other line that I showed yesterday for the product packaging example um where I'm now really doing wholesale on lee I mean, I have them up in my etsy shop but other than that that's it I haven't set up you know, a retail web site where people can come and place orders because like I said that that retail bookkeeping takes a lot of time and that was something that I decided I didn't want to spend my time on based on the amount of extra money it was getting me um I sell things wholesale now even though the wholesale prices half the retail price and then my distributor who does the warehousing in shipping um takes twenty percent off of that so I'm making a lot less profit on each piece, but if I'm accounting for my time at fifty seven dollars an hour um I'm actually coming out ahead because I'm not spending all of that time doing the bookkeeping in the tracking I'm not doing the packing and the shipping I'm not doing the customer service associated with sending those selling those orders I'm not doing the website maintenance um so when you add it all up and look at it together I was able to tell for sure by the numbers that wholesale was the better way for me to go with that line um and then in order to do other things that I wanted to do I started doing some sort of service crafting a sort of doing a lot of props for books and magazines shoots and television and doing just singular craft pieces that I could sell you know for hundreds or thousands of dollars uh two one client one time and not have to worry about producing you know, hundreds or thousands of the same thing and selling them to individual people um so that was the way that my business evolved as faras how I could continue to make a sustainable profit and also do what I wanted to do um but it's it's nice to be able to see just on this chart like what happened to sweetmeats like you can see you know, bacon trend appears in india craft world bacon trend goes global and then sort of falls off from their great um so there will always be forces outside of your business that you can't control like all of a sudden people are talking about but you happen to make meat shaped pillows and all of a sudden bacon becomes up thing like the thing um and so you can take advantage of that for a little while while it happens but then it has this other diminishing returns effect so outside influences are always going to affect your business um but if you know where you stand as far as your business, you can make decisions uh in regards to that that ultimately get you the best return and help you teo get the most profit while you can and, you know, seeing this trend sort of hit and then go national and knowing okay, I've got probably a couple of years until this dies out completely gives you a little bit of runway to decide what you want to do next and how you want to attack the situation. That was a really good question I'm so glad that that was brought I mean, something curious, mr great explanations. Yeah, no, I mean it's it's great. And a lot of people think that you know, your chart should start here and then go up forever. Um, that's not necessarily true, especially if you have different lines or different business is your business can change and evolve all the time based on what you want to do. And it's it's not, uh you don't need to start a business and then, you know, keep it running forever until you retire it's perfectly fine to close down a business, even if it's profitable when it's not satisfying the needs that you have any more um it's perfectly reasonable to turn it into something else it's perfectly reasonable to go back to the workforce on a part time or even a full time basis if it's something that you want to do or if your business is not making you um the money that you want fast enough for the goals that you have um it's perfectly reasonable to say you know what I want to buy a house and want to have a kid and I can't do that on this income I'm gonna go back into the workforce for you know, the next four or five years and then I'll go back to this later I'll keep it as a side project for the time being and then go back to it full time a few years from now um I think a lot of people feel like you know you're a failure at business if you you know don't start a business get profitable and then maintain that and grow indefinitely for the rest of your you know, working life it's totally fine I'm going to tell you this right now it's fine to not keep your business forever you keep it as long as it works for you um and as long as its current incarnation works for you I think as creative people most of us would not be satisfied doing the same kind of thing for the next twenty, thirty, forty, fifty years right um we're naturally a little bit restless and we want to explore new things and we constantly learning and so it's perfectly fine to change from a product business to a service based business to go from a full time business to a part time business or to keep it as a hobby for a little while some people burn out uh when they're doing their crafts for, um for profit and they start to sort of lose why they started making things in the first place so it's perfectly perfectly fine to go back to work even in a totally different field a non creative field too to recharge and re juice too, you know, allow yourself to have that time to make things without worrying about whether they're profitable. Um that is one hundred percent okay, you know, if you need time to explore what it is that you actually want to do and actually want to make um and you find that you can't do that while you're also running your own business because running your own business is hard, it is even if you have your bookkeeping in place and you know where everything is going to and coming from it's still really tough it's a tough job to be the boss of your own business you're you know, on call all the time typically business no small business owners worked longer and harder ours then people who have regular jobs um so if you find that you're burning out it's perfectly fine to supplement your income with something else so that you can just relax, recharge, take a breath, start crafting for fun again, not worrying about making enough by a certain amount of time. Um and, you know, get things, get things back where they are because we only get one life, right? Got a limited time on this planet? We should spend it ideally as much of it, uh in ways that fulfill us and, uh, make us happy as possible. So bookkeeping is how to get your business to that point. But if you find that it's not working for you it's fine to step back for a while or even forever, um I'm not here to evangelize that everyone should have a craft business and that that should be your full time living always and forever. Um, everybody can do it in whatever way it makes them happy. Uh, so let's, keep going. Uh, we've covered these profit notions and, uh, profit versus hobby businesses and we'll go backto hobby business is a little later when we talk about pricing because a lot of folks who run a hobby business uh and you know, they probably don't do bookkeeping and they probably don't uh, try and deduct anything on their taxes, which is one hundred percent fine. Also, and totally reasonable. Um, it's absolutely fine to sell your craft just to sustain your hobby. Um, but we'll talk about what happens when people price that way. When people price at cost, just to reimburse themselves the cost of materials. They continue making the things that they like to as a hobby.