My Next Job 4
Nose to the Wheel, Shoulder to the Grindstone
....And let's see you get some work done in that position! How many times did I hear that growing up. I never understood putting my nose to the grindstone; I never understood putting my shoulder to the wheel. Then I got stuck. I had to put my shoulder to the wheel to get out of the ditch - and it worked. I'm sure that "nose to the grindstone" thing had something to do with being miserly, but really not sure.
In our last discussion, we said we would get past the basic business plan and start with the meat of starting our new venture. In order to make this realistic, let's pick out a couple different ideas to work from as a service business is far different from a manufacturing business in a lot of ways. I will bring in starting up a true entrepreneurial enterprise from idea to invention to market in a later hub. That is a bigger deal than you may think initially.
You hear about companies that are now behemoths that started out in someone's garage and grew to take over the whole market. Companies like Microsoft, Apple, Facebook, and quite a number of software companies had genuinely meager beginnings. There are hundreds of examples of manufacturers who's roots go back to someone's hobby or garage where they worked for years designing or perfecting something only to become an overnight success after years of testing, trying and perfecting.
My point is there are plenty of business plans that develop from hobbies that grow into viable, sustainable businesses. Your business plan may have been able to show that what you do as a hobby can be sustainable and may provide an appropriate path for transition. The plan helps you to evaluate where you are going to need support to get to the next level. So we are going to jump in with a manufacturing concept for our first "Next New Job."
Jim has always loved fishing. He has fished in mountain streams, man-made lakes, and salt water rivers as well as the ocean. His passion for fishing, whenever he wasn't working, was coupled with an interest in working with wood. He had tried whittling his own lures out of soft wood but never could get the lures to perform as those he had purchased. He made inquiries to manufacturers but none were interested in passing on any information. One day he received an advertising flier in the mail from a tool and hardware company offering a lower cost wood lathe for about $150. Knowing this would make it possible for him to "turn" hardwood into the shapes he desired, he purchased the new lathe.
He found some lure parts companies that he could buy hooks, special lips that make lures dive or wiggle, small rattlers that he could drill a small hole in the lure and implant the rattle, artificial eyes, and small eye screws to attach the line. He sourced some high quality blocks of hardwood from different kinds of trees. Finally, he designed a "paint booth" out of a cardboard box that allowed him to use a low pressure paint sprayer to finish painting the lures.
Did Jim add up his cost for all these items as he purchased them - capitalize them or expense them? Did he consider buying business insurance, getting a business license, setting up a tax number for retail, or filing any federal forms in the event he received any income for his efforts. Honestly, no, Jim was doing everything above for his hobby. He went through all of the above, albeit in a serious way, to achieve special lures for his own use and the occasional gift to a friend or co-worker. He didn't keep regular hours, didn't perform any market surveys or anticipate any shifts in buyer preference. Jim was doing this for one thing, fun!
One day while preparing to launch his boat, Jim had already tied on 3 of his favorite styled lures while waiting in line. Another fisherman, also waiting to launch, looked at the lures and commented on how they looked very sturdy and different from what he had just bought at the local tackle shop. Jim, being very proud of his work, offered the man a couple of his home made lures as a friendly gesture. The man took the lures and Jim's contact information and they launched their boats going their separate ways. In about a week, Jim received a phone call. Bill ,the man he gave the lures to, was calling to ask Jim if he would make him more of these lures. He said he had caught several fish on these while the others he had purchased that same day hadn't been nearly so successful. Jim asked him how many he wanted and Bill said 100. Jim was astounded - 100, that is more than he had made in 3 months. Bill said, "I paid $8 a piece for the lures that didn't catch any fish, I'll pay you $10 a piece for 100 of these if you will make them for me.
Jim had to think now. His first evaluation of the situation was that if the other company could afford to make the lures and the retail cost was $8, surely his cost would be less than that - so if he was going to sell lures for $10 he would make at least $2 per lure - in this case a cool $200. So Jim agreed to produce the 100 units by the end of the next week, right off the cuff. Keep in mind, Jim was working full-time at a regular job and the making of the lures was something he did in the evenings or weekend until now. At his regular job he made about $20 an hour plus benefits. All important information for later.
Jim accepted the offer. He went out to his shop and counted up how many pieces of the wood he used he had on hand, 22. So he would need to buy 200 more so he would have enough for the family reunion where he planned to provide everyone with a new lure. His hook drawer only had 2 sets of hooks, so he'd need 440 - 2 sets per for all he would be building. The plastic lips and eyes were both empty, so he'd need to order enough of these - and the eye screws for the line attachments. Rattles - oh he needed those too - and he had broken the small bit needed to drill those small holes so he needed to get a replacement on that too. Paint - he had to think on this one. He had bought a pint of base coat and had a pint each of the colors he normally used. He picked them up and of course, all were near empty. Knowing he would need to replace all of them, he also thought back about how many lures he had gotten out of each pint. When he realized this he now figured he needed a gallon each to complete 220 new lures, although, he though, he may have a little left over when he was done.
The calculation with the paint made him consider his time he would need to get the lures out to meet his deadline. Each lure takes about 20 minutes to turn on the lathe. Then, it takes about 5 minutes to sand and buff them and make scorings where the lip goes. Another 3 to drill the hole for the rattle. Paint takes two coats with drying time in between - a total of 24 hours. He can paint 5 at a time one color in his make-shift spray hood. Then a final coat of polyurethane adds another 24 hours for drying. The installation of hooks and eye screw take another 10 minutes. Then he realizes he doesn't have a package for them. Jim finds he can use a plastic bag he found online, tough plastic but still clear and large enough to hold the lures. If he folds a pied of paper over the top to seal with a stapler it should give him a point he can put his name on them and get some re-orders.
Adding up how long it is going to take to get those first five lures into a plastic bag and sealed, Jim realizes 3.2 hours of physical work plus 2 days for paint and drying. Since his paint box is only large enough for 5 units to be painted and dry, he realizes he needs more drying space and fixes up 3 drying crates from more boxes. Each crate can hold 25 lures. So now he figures he will create 25 units, paint them the first coat, move them into a drying crate, make up 25 more units, fill a second drying crate. In the mean time put the second coat on the first group. Make up a third group of 25 units. They go into their drying crate and the first group get's their hooks, rattle and eye, then a coating of polyurethane. The second group has both coats and is ready for hooks, the third group is getting their second coat and he is making a fourth group of 25. All of this is on paper.
Jim makes out his order form for the wood blocks he needs, the hooks, rattles and all the other components. He puts all this on his credit card and realizes when the bill hits, his actual cost plus shipping is $630.
Jim works until 4:00 pm at his day job. By the time he drives home, eats supper and starts to work it is 6:00 p.m. By 9:30 he has the first five lures ready for paint, so he stays up and knocks out the second 5 lures. He turns in at 12:30 a.m. The next day he leaves from work at 4:00 eats a sandwich for supper and gets to work on the lures by 5:00. Again he works until midnight completing 10 more lures. He realizes he still hasn't gotten close to finished with the first 25 to get paint on them so he decides to call in sick.
Early the next morning, Jim eats a stick of jerky for breakfast with a cup of coffee and starts to work at 7 am. He takes a break at noon to eat lunch with his wife and relax a moment, then at 1 starts back. Jim works until 5 that evening, eats some supper and comes back to the garage to finish up for the day. At midnight he shuts down the process and looks back on what he got done. By staying at it for 16 hours he was able to finish getting the first 25 into the spray booth and sprayed with the first and second coat - and made up another 15 lures. He decides he is still sick the next day, and has a similar outcome, getting the first 25 lures final dressed and sprayed with polyurethane as well as finishing up and getting the first 2 coats on the second 25. Third day he decided to take the rest of the week off as vacation days. He was able to complete the order and the last paint dried on Saturday. He only needed to finish the lures for family and friends at that point but had all the other lures ready for his customer - on time.
Bill called Jim and said, "Jim, do you mind if I use my credit card?" Jim said, " I wouldn't mind if I had a way to take the card, but I don't have a way to do so." Bill said, "Oh, well that is the only way I can pay you." Jim said, "I'll figure something out and call you in a minute."
Jim called Ed, his brother who had a retail shop. Ed agreed to run Bill's card for Jim if Jim would agree to this as well, which he did. Ed ran the card and 3 days later when the payment posted into his account, he sent Jim the amount paid to him by the credit card processing company - $957.00. JIm said, "Where is the rest of it?" Ed said, "The processing company extracts a fee for every transaction."
So now the customer has paid for his lures, Jim has gotten paid for his work and it is time to see if he made any money. He says $957 less the cost of goods, $630 means I made $327.00 for my labor. One day for 6 hours and four more at 16 hours is 22 hours plus some time on Saturday finishing up. That is 25 total hours. $327 divided by 25 hours is $13.08 an hour, less than he makes on his public job.
But what is Jim missing? 4 days of missed work at 8 hours a day and $20 an hour - $640 of lost income. He didn't count it because it was paid sick leave (non-recoverable) and vacation days (paid days off he doesn't have anymore). He didn't buy a business license - which could cost him big if he gets caught. $125 if he pays up. What about insurance if someone misuses his lure and gets hurt and sues him? Or if the eye hook pulls out and someone gets injured as a result. He didn't count his electricity cost either. What about wear on his equipment - amortization? Did he charge sales tax? No - and if the sales tax guy shows up there will be a bill for $70 waiting plus penalties. After turning all the pieces of wood, he had a huge pile of shavings to contend with. Did he allow for disposal of the waste material? Did he allow for the rent of his space he was using? Sure it was his garage - but now that is a commercial venture and could be a tax benefit if he does it right.
So this is our first venture into a realistic, small, start-up bootstrap company. Can you think of how you would apply the above scenario to developing your own business from a hobby you are currently involved with? Doll making, dress making, software designing, bird houses or something much larger?
We will explore the differences of going into a service business in our next hub. Until then, keep up the good work and let me know if you have any questions!