This post is by Todd Ryan, a Florida-based IT manager who has been selling online since 1999.
A lot of sellers find themselves in between a hobby and a business. They start selling as a hobby, just to make a little extra income, and enjoy the process of buying and selling. But after a while it’s not as much fun as it used to be. It takes more and more time, and a lot of the work becomes frustrating and repetitive. It’s no longer a good hobby.
But it’s often not a great business either. It may be profitable, but only just. If you are in this situation, you can find yourself working a lot of hours, but discover – when you properly calculate all of your costs – that you are making less than the minimum wage.
Many sellers struggle with making the leap from hobby selling into building a legitimate business. Making that change isn’t everyone’s goal, but it was certainly a pivotal point for me and my business. This post is about what I’ve learned in taking that path, and I hope it helps you if you’re on that same journey.
Why can’t a business be like a hobby?
This is a fundamental problem. A business that acts like a hobby often falls into the same result as a hobby: money flows outward faster than it flows inward. It can’t last.
So what’s the key difference between a hobby and a business? A hobby is something you do for fun or entertainment, but a business is something you do for profit. The IRS does a great job of capturing what I would consider the pivot point:
Does the time and effort put into the activity indicate an intention to make a profit?
If you intend on making a profit from your business, legally and logically you should treat it as a business, because that’s what it is. But how do you do that? What do businesses do that hobbies generally don’t?
The key to a successful business is this: the magic of repeatable processes.
Successful businesses rely on:
- Repeating the things that work for them.
- Finding and stopping the things that hinder their success.
- Making every position and person replaceable.
If your end goal is to sell your business or go public, you can’t sell yourself nor can you put your personal name on the stock exchange. You are not your business, so make sure your business can stand on its own two feet.
What are repeatable processes?
To grow from a hobbyist to a business you have to act like a business. That doesn’t mean you lose the “you” that makes your business rock, it just means that you take steps so your business can survive with or without you, as well as making it valuable to an outside party.
Businesses in all sectors adhere to principles that share a few things in common. Be it via manufacturing-oriented programs like Six Sigma, or data auditing standards such as HIPAA or PCI, all businesses gravitate towards documenting their processes and standardizing the things they do to minimize the risk of mistakes or failures.
Most processes are repeatable and – unless it involves divining rods or a sixth sense – the things you do all involve a series of steps that you follow pretty much every time. Those steps might be conscious or subconscious, but either way you need to capture and document them.
Repeatable processes can be delegated, but you can’t hand them over to someone else until you decide how you want them done. Consistency is key – investors, finance companies, shareholders, and employees all love consistency. If you’re positioning your business for sale or investment, you won’t get far with financials that seem random or uncontrolled. Consistent action = consistent customer experience = consistent growth.
Repeatable processes are measurable. The old saying that “if you can’t measure it you can’t control it” seems to be universally true. To control something, you have to measure it to know how and when to make changes. To measure it, you have to document what “normal” looks like so you can measure the variances.
Repeatable processes relieve some of the burden on your mind and thoughts. How much of your thought time is spent trying to remember to file your sales tax? Or which size poly bags you need to order? Or if you bought enough Pie Face games, or are even making money on them?
Your mind is better used innovating, so offload these thoughts and processes to systems you can count on. Once they prove themselves, you can stop thinking about these things and pursue bigger thoughts for your business.
Key online selling processes to make repeatable
Think about all the things that can disrupt your business growth:
- You forgot to reorder and your private label item is out of stock for 3 weeks, resulting in a significant loss of sales rank and a long-term drop in search rankings.
- You ran out of 6x6x6 product boxes so you shipped in a larger box resulting in a damage complaint.
- You ran out of supplies and had to pay a premium for bubble wrap at a local big-box store.
- You didn’t keep up on your accounting so you had to file an extension and pay a penalty on your taxes.
- You had more work than you could do, but you couldn’t ask for help because you didn’t have enough time to properly show someone else what needed to be done. Your choices were to either work yourself to the bone, or blast through the basics and hope it didn’t result in any mistakes severe enough to result in account suspension.
All of the above examples I know to be true. Why? Because they happened to me.
I realized that my business growth had strained the hobby structure and it was time for a change. I created regular, repeatable processes to handle all of the above and went from chaos to a well-oiled machine – with impressive growth to show for it.
Here are five of the most important online selling business activities which I recommend making repeatable.
#1. Prepping and shipping
Prepping and shipping, in my definition, are all the steps required from the moment you receive inventory to the moment it is checked in at Amazon (if you use FBA) or received by the customer (if you do your own shipping).
What it was like for me
Before I worked on my processes, I seemed to be constantly digging through my stash of boxes, or rummaging through polybags to find suitable material. Most of the time, it felt like I failed. That resulted in hurried trips to a local supply store, scrounging for cheap materials on Amazon or eBay, or making a Frankenstein-style creation that I was embarrassed to ship. It was time-consuming, costly and bad for my reputation as a seller.
Not only that, several times I bought hot products that sat in my garage for 1-2 weeks because I didn’t have the right packaging materials. By the time I got them shipped to FBA the price had tanked. I was turning profitable products into loss-makers.
Making it a repeatable process
Know what is needed to deliver each product. Make notes on what size polybag, box and materials you need for each product, and build a master list. In your monthly business checklist, add a task to check and reorder supplies so you are always prepared to turn product around.
Document and post Amazon’s packing standards in your prep area. At the very least make sure everyone knows the suffocation label, double seal, and polybag requirements by heart – reinforced by posted documents.
Remember that from the time you pay for an inventory order, to the time each product sells, that purchase is costing you money. It might be in tangibles like storage fees, or intangibles like reducing your available sourcing funds. Your goal should be to get inventory in a position to be sold as soon as possible.
If you’re placing a sizeable inventory order and have your packaging supplies documented for each product, your warehouse staff can check your supply stock well in advance to make sure you’re prepared to turn the product around quickly.
#2. Setting and controlling prices
You can’t control a lot when you sell through online marketplaces like Amazon. But price is one of the few factors totally under your control.
Establish your profit standards and stick with them. It is especially important to set your minimum profit percentage, if you’re trying to increase your overall profit margin. The higher your margin, the more money you will net for the same amount of work.
What it was like for me
As I said in my repricing tools mythbuster, I’m very competitive and acted at the emotional level when pricing manually. I lowered my prices with reckless abandon and had no idea where my profit margin floor was. When everything came out in the wash in my annual accounts, my profit margin reflected that reality.
Making it a repeatable process
Know your fully loaded costs on every item, and base your minimum price on your minimum profit margin.
Make sure you are fighting for every shot at the Buy Box. The only effective way that I know to do that is with a repricer.
Conversely, know your walkaway point. If an item is stagnant and won’t sell at your minimum profit margin, sometimes your best choice is to dump it and invest that money elsewhere. This jump-off point will depend on how much your funds cost you, your cash flow requirements, and external factors such as long-term storage fees.
We all have areas of business in which we are not strong. But consider this: those parts of our business where we are weaker as individuals are also the areas where we have the most to gain. Don’t avoid working on something because you aren’t good at it. In fact, do the opposite – prioritize it, make changes, and reap the greatest rewards early on.
#3. Restocking inventory
You can’t win the Buy Box if you don’t show up to the game. Make sure your profitable products are always in stock and available for your customers to buy.
What it was like for me
When I ran my business like a hobby, profitable items could simply be abandoned if I forgot about them. I didn’t have a process or tool to track sales velocity and plan when and how much to reorder. I might rediscover bestsellers later, but that could be months of revenue I missed out on.
Making it a repeatable process
Restocking is all about timing. Figure out how long it takes to receive, prep, ship, and get each product available at Amazon. That’s your lead time, all the way from ordering to making the first sale to a customer.
Know how long your stock will last at your current sell-through rates. Combined with the lead time, you can calculate exactly when and how much to reorder. Build in a buffer, so an unexpected delay in receiving or processing the inventory (or an unusual sales spike) will not throw your plans off track too easily.
By being methodical with restocking you won’t guess at your purchase orders and tie up funds by needlessly overstocking products either. Cash is always limited, so spend it where it can do the most for your business.
#4. Accounting and financial records
Bookkeeping, for most sellers, is right up there in terms of stress and difficulty – second only to finding profitable items.
If you are not current on your bookkeeping on a regular basis (at least quarterly), you are flying blind. You won’t know if your profit is going up or down, if you’re upside down or the right way up, if you need increase altitude, or look for a parachute.
What it was like for me
I used to judge the success of my business by my most recent sale. If it sold for more than I paid, I thought I was doing great.
That worked initially, but as the weeks went on my cash flow came to a screeching halt. I was left with a hefty credit card bill with barely enough sales to make the monthly payment. You can’t properly assess how your business is doing without good financial tracking and reporting, and I certainly didn’t have that.
Making it a repeatable process
Make a checklist of everything you need to finalize each month, and work through that checklist on a regular basis. Let’s face it, you’re smart but you’re not able to keep track of every detail in your head.
Build another checklist of every marketplace, bank account, and credit source you use. Early each month, reconcile each one of those to the previous month end and make sure the account is accurate.
Know your net profit margin. Even pseudo accounting solutions (such as InventoryLab or ScanPower) can provide this information. Your goal should be to know your exact profit margin every month, and do everything you can to increase that number the next month.
Show your work and check your work. Accounting is math, so treat it like math. Keep records of every transaction in full detail, and have an outside party review your results on a regular basis. Whether that’s hiring a CPA to do your taxes, or a bookkeeper to review your books, independent review will increase your company’s value as well as prevent costly mistakes.
#5. Taxes and other legal compliance
Every seller knows that there is a wide gap between what is systematically required, and what is legally required. For instance, Amazon does not force you to collect sales tax, doesn’t ask for proof of insurance as soon as you start selling, and doesn’t report your annual sales to the IRS below a certain level.
However, every seller should also know that they are required to collect sales tax, insurance is a must, and sales of any level are considered income. Get your ducks in a row as none of these items cost less the longer you wait. All of them cost a whole lot more if you get caught ignoring them.
What it was like for me
I actually did pretty well with all of these except sales tax. I signed up to collect it, but didn’t set up processes to remind me how and when to file each quarter. So, two quarters in a row I spent hours trying to remember how to file and what number goes where. Those two quarters I filed late and got slapped with a pretty hefty penalty.
It’s surprising how $100 in fees motivated me to set up a simple process to remind me when to file and exactly how to do it.
Making it a repeatable process
Make sure you automate as many of these items as possible. For example, set up your insurance premium to get paid automatically and to renew each term. Use a third-party tool like TaxJar to help you track your sales tax liability and collections, and create a reminder to make sure you file on time or even early.
Keep documentation showing compliance with each of these, whether it be your LLC filing fee receipt, or the confirmation page from your sales tax filings. If you decide to sell your business, it will prove to be very valuable and impressive if you can readily produce these documents.
In closing
Documenting and standardizing is tough. A lot of entrepreneurs love the “thrill of the chase”, and the freedom that owning a business provides, compared to their former lives. If you’ve spent years in the corporate world, breaking free from all that bureaucracy can be incredibly liberating.
However, documenting and automating the tasks that don’t add value to your business allows you to delegate the more repetitive work and focus on what you do best.
An example often cited by successful Amazon seller Shawn Mayo is based on product sourcing. If you, as a seller, can go out and source products in one hour that would net you $100 profit, doesn’t it make sense to pay someone $10 per hour to prep and ship those products? In that additional hour you freed up, you could make an additional $90 profit to compensate for the $10 in wages.
Processes free up your mind, and documents free up your hands to focus on your business. I don’t know of a single seller who couldn’t benefit from a little extra of both.
This post was by Todd Ryan, a Florida-based IT manager who has been selling online since 1999. He currently concentrates on the Amazon marketplace, growing 100% year-on-year and employing three people in the business.
Credit: Editing by Andy Geldman
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