Running it as a business

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Brian.Evans

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Here is my situation. My first pre-order sales thread generated just under $3,000 worth of sales. It seems I have a decent opportunity in front of me of turning this into an actual money making side business, not a money pit hobby. I don't want to run my shop like a hobby, I want to run it like a lean business. I want it to be able to stand on its own.

Can we discuss how to do that? Maybe with examples or ideas on how to track costs and profits, figure out exactly how much each knife costs to make, how to be more efficient. Stuff like that.
 
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The heart of running any business is bookkeeping. You need to keep all receipts, log all sales, log all expenses, and have a regular weekly bookkeeping time where all that gets logged into a bookkeeping program ( unless your wife or someone will be doing it weekly). Put a box on a desk or by the computer and drop every receipt, invoice, stub, note, etc. in it.

Many apparently successful businesses close because they don't really make a profit. I knew a restaurateur who closed three popular restaurants because he was tired of making over $1,000,000 a year and keeping less than $15,000 for himself.

Expenses to consider in a hobby business:
All regular expenses should be posted when the money is spent. If you buy $500 in steel or $300 in belts, it is a one time expense ( even though you will use them for multiple knives). That is because you will be constantly using these materials and replacing them. In the course of a year it balances out about right with sales. Obviously, all sales need to be posted only when you get paid. Inventory and orders are great to have, but you can't spend them. You should keep records on inventory if you start getting a fair amount built up, but it isn't money in the bank, ...yet.

All supplies, miscellaneous materials, small tools and parts, etc. are a one time expense ( even though you will use the item for multiple knives).

The best way to work the tools and equipment into the plan is to amortize them. Total all the tools and equipment you currently have, and divide that by 60. That is a monthly amortization for a five year life ( the norm). If you have $6000 in equipment, it cost you $100 a month for those tools. As you buy new equipment, divide by 60 and add that amount to the $100/mo. current. So, if you buy a second KMG for $1800, you will add $30 a month more, making your amortization now $130 a month. This is a monthly expense just like steel and wood.

It probably is a good idea to deduct about 10% of your utility bill for the heat and power in the shop.

Don't forget knife show table fees and expenses, too.

As a hobby business, you don't need to deduct shop space or personal salary, but you should at least know that they would be needed if running as a full time business.

What I left out of this is business expenses. You will have to monitor the bottom line for a year or so and decide if you are running a business or a hobby. If you make more than about $3000-5000 a year on the bottom line, then you need to call it a business and get a business license and pay taxes. Below that, it would be declared a hobby.

Also, if you are selling any dollar amount of knives at all ( regardless of the bottom line), it might be a good idea to talk to your insurance agent about your homeowners insurance.
 
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The biggest mistake you can make if you are considering treating this as a business is to take customer money before the knife is finished. I have seen many makers do this and watched it implode.
 
Although, the IRS may have minimum profit levels before they consider an endeavor an actual business vs. a hobby, your state probably has a much different viewpoint on this if they collect sales tax. I'd suggest getting a sales tax number, if you don't already have one and collect and submit sales tax . . . no matter how low your sales or profits are.

It can be confusing at first to determine the difference between a supply vs. cost of goods sold vs. other expenses. It can be very helpful for you to download a Schedule C and the Instructions for Schedule C and begin to get a better feel for what "box" to store your receipts into. I keep a binder with every receipt pasted to a letter sized paper for every purchase that I make for my business. This has been most helpful when I figured out I'd been categorizing some expenses incorrectly. I went back several years, corrected my books, and amended my tax returns.

I've been using Quick Books. It is a learning curve all in itself and has been very frustrating to get set up without someone to give me advise. Yet, now that it is set up well, I can have my Schedule C tax line amounts summarized or detailed in about 3 minutes. I don't need a tax preparer to help me.

I'm sure the book keeping could also be done in Quicken or MSMoney by categorizing expenses and income; A simple worksheet may work well too.

The key is understanding what types of purchases and expenses should be associated with each of the lines on Schedule C. If this is something that you'd rather not dive into or understand in full, then you'd be best to speak with an accountant for some up front guidance. Believe me, it's easier to start out with your books in order, than it is to go back and correct your books if they were kept improperly.

Mike L.
 
Pay someone smarter than yourself or I to help with a business plan. Pay your tax's. Put money aside because you will get cut!
 
i've been self employed since 1979.. first in construction till 2003..now in retail sales...i hae always used quickbooks pro and you can set up every expense and give to each project including hours...after a year you can see what you used for materials and hours for each project..and the yr end reports are so simple for your accountant..everything is itemized for each account created..on hobby you never get paid for hours put in...in bussiness you have to get paid for hours put in..unless like me you work 14 hours every day for 7 bucks and hour{}..now im 60 and being self employed the govt got all my income..
 
rc4u12 said:
..on hobby you never get paid for hours put in.....in bussiness you have to get paid for hours put in..unless like me you work 14 hours every day for 7 bucks and hour{}..now im 60 and being self employed the govt got all my income..
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I believe that your message is that a hobby is generally considered as a venture where a person does not intend to earn a profit, and a business is a venture where one intends to earn a profit.

Yet, it may be construed as where you are saying that when you set yourself up as a business, that your time must be accounted for.

Technically the owner's income/work/hours generally are not allowed to be claimed as an expense against the business unless the entity is something larger than "self employed" or a "DBA". You can charge your time against projects and then run reports on project profitability, but your time/salary/income is not a business expense. Owner's income is usually considered "Owner's draw".

I don't intend to be contradictory to your reply, I just want to clarify the subject a bit.

Thanks,

Mike
 
Work in batches to maximize profits. For a knife business, branding is critical. You need a good logo, and a strong guarantee. Provide a location (for me, a forum) for your customers to gather and buy your knives. Feed the 'location' (mine is here at Bladeforums) regularly with knives. Nobody gathers around your forum if there is regulary nothing to see or buy. Post a lot of what you do. You need to name everything you do. People like to study things and memorize things. Remember that your time must be billed at a minimum of $50hr to survive. Remember that your time must cover all expenses and employees. Do everything above board, pay your taxes, hire a good accountant, pay people with the proper paperwork. Do not get into debt. This means you need to grow slowly. Thats also a benefit, because even though your orders seem like they may lead to big opportunity (and they may) it is hard to sell knives consistently enough to stay afloat. Sales is the hard part. So growing slowly is actually a good thing. Be aware that there are major ebbs and flows to revenue in a knife business. The panick during the first few ebbs will put you on your knees. Its common, its real, and its worse in July. Be prepared for the July slump. Be very careful about insurance, especially your homeowners coverage if your shop is in your home. And, remember, every one of the dusts will kill you. Be vigilant about safety on all levels.

It can work! Good luck.
 
Consider incorporating as an LLC or S-Corp to protect against personal liability. If you get sued (as long as you are not mixing work and personal) they can only go after business expenses.
 
Thanks for bringing this up, alot of good advice here! I am hoping to do the same thing you are looking at in the near future.
 
yes your right about the expenses that hours are not per se deductible but was not meant as tax reporting as there is no thread long enough for that..just was stating that if you want to know how much you are making for each project you have the data to do so...and can then either not make any more or raise prices.. just a way of keeping track.. of course yr end reports dont show hours worked as it has noting to do with deductions..but if kept track of hours then you know how many hours worked and divide by net after expenses and you can see how much your time was worth...forum typing like you stated can be thought of in many perspectives..jeff


logem said:
I believe that your message is that a hobby is generally considered as a venture where a person does not intend to earn a profit, and a business is a venture where one intends to earn a profit.

Yet, it may be construed as where you are saying that when you set yourself up as a business, that your time must be accounted for.

Technically the owner's income/work/hours generally are not allowed to be claimed as an expense against the business unless the entity is something larger than "self employed" or a "DBA". You can charge your time against projects and then run reports on project profitability, but your time/salary/income is not a business expense. Owner's income is usually considered "Owner's draw".

I don't intend to be contradictory to your reply, I just want to clarify the subject a bit.

Thanks,

Mike
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My .02 cents. Quickbooks pro is very powerful but often overkill for most small business. We used quicken business for our collision shops at $1 million in sales and with employees just fine. Quick books also requires more investment in learning the software.

Think lean manufacturing. Earlier mentioned batch processing is huge. Constantly Setting up and breaking down setups adds no value and costs u time.
 
Thanks everyone for the comments. Lots to think about.

hsc3_90293 said:
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Think lean manufacturing. Earlier mentioned batch processing is huge. Constantly Setting up and breaking down setups adds no value and costs u time.
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This is actually something I'm fairly decent at. I'm a medic by trade and there is a HUGE push in the medical field to use lean processes to increase efficiency especially in low margin areas like EMS and ER. I'm always on the lookout to make my processes more LEAN.
 
JMJones said:
The biggest mistake you can make if you are considering treating this as a business is to take customer money before the knife is finished. I have seen many makers do this and watched it implode.
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Amen! I have never taken a dime before a blade was ready for delivery, ever. Seen it cause too many problems.
 
Hi JohnnyMac. Been a while.

Never take deposits in advance. When you do, you owe that customer, and you work for them till delivery.
 
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