Now that you have addressed other important issues such as finding good inventory and sourcing your business’ key goods and services, and pricing, describing, and posting your books online, let’s really get down to brass tacks. It is my firm belief that nobody should try to operate a small business without a clear understanding of, and quantifiable answers to, the three key business questions that follow.
The Three Key Business Questions
· What is your break-even? Chances are, if you are operating out of your home, that you have very few business-related fixed expenses that must be paid regardless of how many books you sell and what you get for them. But you probably have a few, and one of the first things you should do is to list them, total them, and determine what is your break-even budget: how much revenue do you need to bring in each month to generate enough profit to pay these fixed costs? To set up a useful, interactive “what if” spreadsheet that will allow you to project your break-even as well as other outcomes “for better or worse,” use the Table called “Determining Your Break-Even Point.”
· What are your long-term goals? Ultimately, do you intend for your efforts to be a hobby, to provide a nice part-time income, to give you a living wage, or to make you a prosperous, successful professional? I suggest that you use the Table entitled “Projecting a Business Plan” as a beginning point to set some goals for yourself and to help you decide exactly what you want to get out of the work you put into your business. The definitions of what is a part-time income, a living wage, or a prosperous professional’s rewards may vary greatly based on where you live, what stage of life you are at, and what your financial responsibilities are, so don’t settle for our guidelines if you feel you can improve upon them. But whatever you do, don’t succumb to the cop-out of setting no goals at all. Building in some quantifiable expectations will allow you to give yourself a pat on the back if you reach them, to decide that you need to strengthen your business plan if you fall short, and perhaps to move on into a more suitable endeavor if you determine that you have been wildly unrealistic.
· What are the “metrics” necessary to meet your long-term goals? If you’ve left a high-powered corporate environment to work out of your home, thinking in terms of performance “metrics” or “benchmarks” may be the last thing you want to do. But if you are seriously committed to making a go of it, you owe it to yourself to translate your overall business goals into some very specific and concrete performance goals, and that’s what metrics are. Using the “Business Metrics” worksheet, try to translate your business goals into yearly, monthly, weekly, and daily benchmarks for number of books sold, total dollars sold, size of inventory in units, size of inventory in dollars, number of books listed, dollar value of books listed, and number and value of books acquired for listing. If you don’t set goals and translate them into metrics, you’ll never know if you are succeeding or failing.
Once you have done the work to address these questions – either on your own, or with the help of the aforementioned tables, or with an accountant’s help – you should find it relatively simple and straightforward to review, refresh, and update your approach to these questions on a regular basis. How often is “a regular basis”? Well, your obligations to the government require you to address your financial performance only once a quarter (for estimated tax payments) or once a year (for income tax returns), but that’s not enough. You need to stay tuned in to market changes and to your own performance so that you can be quick on your feet when it comes to tweaking your business model or strengthening your inventory, market plan, or competitive edge. One of the approaches that will help you stay tuned in to what’s important is to review these three key business questions monthly or even weekly.
These are just a few fundamental questions where your ability to provide yourself with good direction and helpful answers will depend greatly upon your ability to maintain accurate business records and organize them in useful ways. If your business is growing and you’d like to explore other ways of making financial record-keeping work for you, I suggest that you pick up a copy of a very good book called Managing by the Numbers : A Commonsense Guide to Understanding and Using Your Company's Financials: An Essential Resource for Growing Businesses by Chuck Kremer and Ron Rizzuto (Perseus Press: 2000; ISBN: 0738202568).
Organizing Your Business
Running a small business can become an administrative nightmare if you allow things to get out of hand, but there’s no need for you to allow it. Taking a few simple steps early on can go a long way in helping you avoid unnecessary problems later. So I’ll start with these suggestions:
· Maintain some physical separation between your business life and your home life. To the extent that space allows, this might mean separate desks, separate “in-boxes” for mail, separate bank accounts, separate rooms in your house, and that sort of thing.
· Even if you plan to have an accountant or tax service do your taxes, I recommend that you make use of a relatively cheap, popular business software program such as Quickbooks or Quicken. I mention these two from Intuit specifically because, while there are plenty of other good accounting programs, these two are so ubiquitous that they have become the standards, and using them should mean relative ease when it comes to downloading and uploading your business files between them and your online bank account, on the one hand, and any tax preparation software you may decide to use, on the other.
· Organize your business from the beginning as a sole proprietorship, pay attention to your tax obligations, and organize your record-keeping, financial reports, and financial projections from the beginning to be driven by your tax reporting obligations as you’ll find them in Schedule C (see below).
· Spend at least 15 minutes a day on your business finances and you’ll save yourself dozens of hours later.
· Look for every available opportunity to run your business on-line, using an online bank account, a well-organized email system, a software program such as Quickbooks, and either someone else’s software products or your own system of spreadsheets for inventory and fulfillment record-keeping, and one of the online postage and shipping programs like Endicia. It just doesn’t make sense to run an internet selling business out of shoeboxes of paper when its elements become more and more computer-friendly every day.
Licenses and Legalities
Organize your business from the beginning, or from now on, to operate properly under the applicable business laws. This means, for starters:
· Maintain accurate and complete financial records necessary to file federal and state income taxes for your business, and file and pay these taxes on time.
· Maintain accurate and complete financial records necessary to file state sales taxes for your business, and file and pay these taxes on time. In all likelihood, this will mean paying sales taxes only on the sales to customers who reside in the same state as you, since you are probably maintaining an office or business place only in the state where you reside. Having a state sales tax certificate will also provide you with the documentation you will need to forego paying a sales tax when you buy books at library sales and used bookstores.
· Register your business with any authorities that require such registration. The best place to start is your town clerk’s office and the website for your state revenue department. Such registration or licensing may result in fees roughly equivalent to a month or two of Amazon Pro Merchant fees, but compliance with the law is always the best policy. Those of us who conduct our business online should never make the mistake of assuming that the laws don’t apply to us because our businesses are somehow invisible. Among the several reasons this is true is that such presumed “invisibility”, if it is the case today, will probably not be the case for long.
Insurance
There are several different varieties of insurance to think about here, and of course each of them may involve a choice between spending money and going without. Maybe you’ve been thinking of your enterprise as a hobby in many ways, but if it is providing all or a significant part of your income and it represents your primary plan for the future economically speaking, you need to guard against unforeseen catastrophes. You should certainly start by trying to get the most out of the money you are already spending, but don’t reject out of hand the possibility that you may need to spend some money on several different kinds of insurance. Although these costs may be higher at first blush than your current insurance costs, remember that your business insurance costs are fully deductible business expenses, so that you may end up with a net savings after all.
Health insurance is probably the single most important element in the economic safety net of any individual or family, and if you have any way of continuing health coverage either directly or through a spouse or domestic partner, give serious consideration to doing that. If you or your partner is leaving the day job, you may be able to continue health coverage temporarily under the provisions of the COBRA Ac t of 1986, but that can become very expensive very quickly. You may also want to investigate group health insurance coverage plans available through organizations such as the Independent Online Booksellers Association, the American Booksellers Association or its regional affiliate in your area, or your regional or local small business association.
One of the primary reasons for keeping your day job is health insurance. One of these days somebody will figure out a great way to provide health insurance at reasonable rates to independent home-based entrepreneurs like many of us, but until that happens, we may have to rely on our day jobs or the day jobs of our spouses or domestic partners – boy, aren’t we up-to-the-minute here? – to meet our health insurance needs if they are going to be met.
Property insurance may not seem important at first if you are spending hours posting books that only cost you a quarter a piece, but one day you may well look up and realize that the total listed value of your inventory amounts to $25,000, $50,000, or perhaps even more. It’s unlikely that your inventory will be stolen, but a flood or a fire could knock you out of business overnight. If you work out of space that you have already insured with homeowner’s or renter’s insurance, it makes sense to begin by having a candid conversation with your agent to see whether provisions can be made within your existing policy to meet your insurance needs. But it may also be well worth your time to speak to a business insurance agent – possibly, of course, this will be the same agent – to explore the potential costs and benefits of property insurance, business interruption insurance, liability insurance, and disability insurance. You are your own boss and it is up to you to decide what’s important and what will give you peace of mind. Whatever you do, don’t make the mistake of hiding the fact that you have been running a home business from your property insurer. The likely effect of such deception, should you need to file a claim, will be that the claim will not be honored. If you are working out of your home, you should be consistent in the calculations you make about space and expenses allotted to the home business, and make sure that you use the same calculations for insurance and tax purposes.
Automobile insurance is also worth a new look in light of your business enterprise. The use of your automobile to go on book-buying trips near and far and to take your shipping to the post office on a regular basis will likely have effects on your auto insurance policy, the way you treat the vehicle for tax purposes, and possibly even the vehicle classification under which you register the vehicle. A good personal auto insurance agent should be able to help you determine whether you ought to classify you automobile as a commercial vehicle either because it is a requirement or because it is a beneficial option. In any case, when it comes time to do your taxes, you will be able to depreciate part of the value of your automobile and to take various deductions because part of your use is related to the operation of your business.
