I Made More Money in Gross this Year. Why Did I Net Less?.
Where Did My Money Go?
Ebay© Sellers’ Stupidity You Can Learn From: How to Analyze Your Business Net Profits
As an Ebay© Powerseller, watching sellers drill their business into the ground is an everyday occurrence. The important thing to get, from this writing, is how to avoid being “that seller” in your small business.
So what are they doing that is so dumb, you ask? Let me use an example that I saw today. I know the wholesale price for a certain water bottle that was being sold on Ebay, repeatedly, by 1 seller, for $10. I know the wholesale price is $5 and if he bought a certain amount, the seller could get them for $4.75. So, for this poor seller’s sake, let’s say the seller bought enough to get them for $4.75.
I also know what he is charged in fees by the auction house as well as the 3rd party taking the payment. Base on his standing and feedback, he is paying around 8% of the selling price in fees. I also know it costs around $2 to ship the item. Let’s break that down.
Wholesale Price of Bottle
Label, Ink, and Paper
So you say, “HEY! That seller made money!” That is true! What is left out? Well, if the seller were Amazon, that wouldn’t be bad. Why? Because Amazon automates everything and buys in massive bulk. The actual manpower time it takes, to ship that bottle, for Amazon, is just seconds. Our seller here though, he is, for some odd reason, selling 10 at a time. That means, even if he bought 200, he has to relist them after every ten. That takes some time. He also has to package the item to ship it. He had to either buy boxes or reuse/find some. Then there is tape. Then there is the God-awful checkout process through either Ebay or Paypal. On average he is spending around 15-20 minutes to ship that bottle if you include all of the related factors. If he keeps paperwork or a database for taxes, you can add a few minutes. Let’s say it took him 20 minutes. If he sold 3 bottles in an hour (he sells like 1 every other day), he would be making around $7.50/hour. That is not too impressive. If he sold a bunch of things in that hour, even better because it takes a lot less time to package and ship a bunch of things at one time! The computer is already going and the website is up, he can grab it all at one time, etc. But, alas, he wasn’t.
This example could be applied to small businesses everywhere! I don’t know how many businesses do not know how much they netted last year. When I hear someone say, “Well, I still have enough money in the bank to pay the bills,” I cringe. Yes, but for how long? How long until your shelves are empty and you can’t afford to pay the bills and buy more stock? How long until you can’t pay your employees any longer? Even worse, how long until you take out another loan without understanding why you are in debt, even further?
Understanding what you make, money wise, and where you stand fiscally, is critical to all businesses and especially new ones. Unfortunately, it is the newbies who make these fatal errors and that is why so many businesses fail in the first year or two.
So how do you get a better feel of where you are at financially? The answer depends on what your business does but the one thing that is true for all businesses is that you have to find a way to track your expenses and how they relate to your products.
By tracking which products cost your business, you will find out something else: Some of the things you do or sell cost you money! This is so hard for some people to acknowledge. My favorite thing to do is help out a senior citizen who is computer literate. I recognize that I lose money doing it and I am fine with that. I work with businesses so it is a nice break to help out someone who wants to do it for fun. I can hear some people saying, right now, “Well it is a free service! You didn’t lose squat.” Wrong. Neither my work time, nor yours, is free. When I am not with a client or working at my desk, it costs me money. If I spend twice as long as expected on a project, my pay rate is cut in half! I also pay my bills with that money so the AC, for example, in my office was on twice as long as it should have been for that project costing me double. Some will argue, well it would have been on anyway. Yes, but it would have been on while I was doing another project that would make money!
So the $100 question, “How do you track that?” That is tough to answer. My suggestion is to use things like software. There are programs out there like QuickBooks or PeachTree that can track some of that. Another way is to put it into a spreadsheet. To make this work, you must document your time as well as your employees. I have found a lot of employers realizing that their employees make more than they do! Worst case scenario, right down all of your costs including payroll. Then, very importantly, figure out the wholesale cost of the products you have sold, and then deduct it from the amount of money you made. If you haven’t paid yourself and the end amount is say, $30,000, then you made $30,000 for your time. If you are working 6 days a week, 10 hours a day, it might be time to consider finding a new job or cutting down some of your expenses!!!
If you can’t, at the LEAST, figure out your net profit for your business, you can expect a call from the IRS soon. They can smell that from a mile away. Our CPA can usually tell me, within a few thousand dollars, what we made for the year. He is sometimes wrong because we have some unusual products that make spectacular profits but after so many years, he has that figured in when he quotes us back his guess. He has a general idea of the percent of items we sell like that each year, and he recognizes that our expenses don’t change much unless we have an unforeseen issue which we alert him too.
More later folks! Good luck with your small business and best of luck with your business analysis!