Transitioning From a Hobby to a Business

Guest Post by Nina Darnowsky Lieberman of Soapmarked.com

This guest post is a followup to my November 21st post, Soap? Nope: Looks Like Indie Publishing to Me, which drew some parallels between the new, wide-open world of indie publishing and the surge in farmers’ markets throughout the U.S. Independent product creators/entrepreneurs face some of the same practical problems as self-publishing authors. Both must learn to take themselves seriously, perhaps for the first time. What are some concerns that come up when you change focus from being a hobbyist to being a professional?

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Many people get into making bath and body products because they enjoy making things. As hobbyists, we tend to be very generous. We make soap or lotion, knit socks or bake cookies because we enjoy doing it. And naturally we then have an abundance of that wonderful thing we made. We enjoy giving our friends and family that good thing we made, in many cases because it is superior to what they can purchase elsewhere. It’s made by us, we watch the quality, we tailor the item for that person’s tastes.

But then, we get to the point where we have experimented so much and still like making our wee soapies. We’ve probably spent quite a bit to get to this point and may think hey, why not try selling some? It seems like an easy way to recoup some of that money.

Here we commonly hit a stumbling point. Being used to giving away our labor and materials for free as gifts for people we know, it can be hard (in our own minds) to justify the true retail cost of our soaps. There are some magical figure-out-how-much-each-one-costs-and-multiply-by-x, but x seems a lot to us. So we make up a number that seems reasonable and stick to it because we feel guilty for charging what our product is actually worth. This guilt is something I’m still getting over myself, and feel bad sometimes for charging the sales tax (it doesn’t mean I don’t do it; I still owe the state that money and am legally obligated to charge it!!).

I have to look at my products and see that yes, if I were on the other side of the deal I’d pay that much for them… and in many cases at retail stores am getting much less value for my money than my customers are. Not that I’m saying retail items are bad; just that a larger store has larger buying power and so can get their materials for less than I do. So one of their $6 soaps in comparison to one of mine has more profit built into it. Yes, they have larger overheads, but they also have waaaaaaay larger sales volume than me!

Keeping careful track of your expenses is a MUST if you’re turning yourself from a hobbyist into a business. Detail is key. I know how much each ounce of each item costs from each supplier. I know how much I use in each recipe and what the yield of that recipe is, so I then know how much the bars cost. Don’t forget to factor in your time for the labor.There’s a myriad of little details you need to know. Say the materials for one bar of your super special banana bar cost $0.48. That’s not much, right? So you could sell it for $2.00 and make a profit… right?

Nope. Don’t forget about packaging. Oh yeah, that’s another $0.12 per bar. And it takes time to design the label, don’t forget that. Then there’s the wrapping the bar, more of your labor. Researching where to sell it can take a while. Don’t forget about the supplies you need to sell at a market, your own canopy is a great thing to have, and tables, and tablecloths, and then little baskets for displays, or trays, or do you want to invest in wood display boxes? Well, that’s another $100. Then of course there’s your booth or table fee for being a vendor, anywhere from $10 to $200. So that little bar of soap needs to make you enough profit to pay for itself, pay for the labor you put into making it, pay for materials to make the next bar, pay to send your cat to college….

Deductions are also key. Here, more careful record keeping is in order. Do you plan to have a home office? You’ll need to have the space qualify. What about storage of your bulk materials–you do plan to buy in bulk, right? You can sometimes count that space as part of your home office deduction. And mileage, don’t forget mileage. It’s now July 8, and so far this year I’ve driven over 500 miles for markets, to buy supplies, etc. That’s another deduction, and with the way gas prices are going it could be more for 2011 than it was for 2010, which was around $0.50 per mile. For me so far, that’s a pretty hefty deduction. Add mortgage insurance, mortgage interest, and utilities multiplied by the percent of my house that qualifies as a home office and the deductions just keep adding up when tax time rolls around.

Don’t forget your equipment! All those molds and spoons and cool containers can be claimed differently than your raw materials in some areas. Of course, you use them over a period of time, so in some countries you can claim depreciation on them and even spread the aggregate you spent on them into deductions over more than one year in some cases. No, I’m not an accountant but that’s another expense you need to look into.

And please please do not forget to look into whatever business licenses you will need in your area to stay legit. You reallllllllly do NOT want to pay any fines for selling items without charging applicable sales tax, or even inadvertently selling illegally because you needed a license and didn’t have one but were selling away merrily without a care.

Don’t even get me started on insurance! In some areas it may be part of your homeowner’s (or renter’s?) insurance but don’t assume it is. You don’t want to lose your house because of a lawsuit which you didn’t have the insurance to cover.

A business bank account is not a must just yet when you’re very small, but will become one as you grow. Some states may require you to have one. And what happens when you receive a check made out to the name of your business and not you directly? I guess you could just not collect on that money, but being a former banker, I like cashing checks and getting the money from them!

Banks are going to require a DBA (Doing Business As) name from you in many cases, though in some states (a small number) you won’t need a DBA name to open a bank account in the name of your business if you include your last name in your business name, or in some cases your full name in your business name, i.e. Mary Smith’s House of Waxy Buildup or Smith’s Floor Removal Service. I don’t really want to call my business Nina Consuela de Nada Santa Cruz’s house of Soapy things (names have been changed to protect the innocent) and for now am being naughty and using my personal sole bank account as my main business account. Yes, I am advocating using a business account… but for now, I don’t take checks 🙂

And just a word of warning about picking your bank: if you are a sole prop and have a business account with a bank, if you are overdrawn and owe the bank money on the personal side, they can and will take money from your sole prop account to cover the owed funds. They have the right to do this any time… read your banking disclosures. It’s called the right to offset. If you’re a different type of business, like an LLC or a Corporation, they can’t since the funds are owned by the business and not you as a person.

Also, some banks will charge for processing cash in or out of your account. Usually it’s any amount above x in cash per statement cycle (look for the date your statement was cut; it won’t necessarily be the same date the next month but should be the same business day–confirm with your bank if you’re not sure exactly when it cuts). Yes, they can charge you for depositing cash into your own account. Many banks do this to discourage people from bringing in large amounts of cash that will tie up their employees in processing it. Again, check the account disclosures and make sure you understand them. It all comes down to what they give you in writing.

This is all overwhelming. After all, you just wanted to sign up for the local market day or craft fair and bring in a little income, right? Not if you’re going to be a business.

There are a lot of things I haven’t even touched on here, like using social media for promotion…. And there’s the hours and hours spent designing the website, and researching new recipes. Researching new suppliers, testing new recipes, testing new ideas…. You’ve got to love it or it’ll drive you mad in the end.

This post first appeared here on July 8, 2011.

Thanks, Nina!

3 thoughts on “Transitioning From a Hobby to a Business

  1. for us writers, this is so important. I keep very detailed records of my expenses and am able to deduct them even without a sale in Canada, as long as I can justify my records with receipts and reasonableness.

    I also run a small therapy practice and again, receipts are important. And so is knowing the tax rules and following them.

    it’s all good.

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