Big changes have been afoot in the land of FIRE: I started a business! It’s been a hectic few weeks working on it in addition to my day job and other life activities, but I would like to take time today to share four lessons I’ve learned in the last month for others interested in doing the same.
The first thing I learned from this is that starting a business is slow and laborious. I was inspired to start mine after reading an article online about one couple’s journey to retirement where the wife sold off a fulfilled by Amazon business, i.e. an online shop where logistics is done by Amazon, that was making them $100k/year. She was basically a stay at home Mom, and if she could do it, then someone like myself with all my years of business experience and analytical skills could surely do the same too! I found out early on though that you need to have many things set up before people will start working with you: (A) a registered company, (B) federal tax ID, (3) business bank accounts and credit cards, (4) other proofs of ID like bank account statements. All of these things take weeks or months to set up. I would not be surprised if this first hurdle alone kills many business ideas in the crib – and the U.S. is exceptionally fast by global standards.
Next, you must be selective. You cannot just sell any product to anybody, not when you have limited time, money, energy and enthusiasm. It needs to be something you’re genuinely interested in or else you won’t know what appeals to your customers, and the hours required for the job will wear you down. If I were to start selling fairy memorabilia to 6 year old girls, for instance, I would quickly start to hate what I was doing and I probably wouldn’t make much money either, as I just don’t know what 6 year olds are looking for when it comes to fairies. Instead, I plan on selling home décor to guys aged late 20’s to early 40’s like myself. I’m interested in art and interior design, understand guys like myself, and find that there is a gap in what’s being offered in retail outlets like Target, Bed Bath and Beyond, and Home Goods for my demographic. I’m not creating the next Apple. I’m just taking an interest of mine and turning it into a hobby that brings me money. By being focused, being selective, you can be successful.
That being said, you must be able to perform financial forecasting. This sounds much harder than it really is. All forecasting encompasses is using addition, subtraction, multiplication and division to anticipate all of your costs, all of your profits, and when more money comes in than is going out. Again, you money is limited. You need to know, in advance, whether something will be profitable before you start investing in it. How much does it cost to produce? How much does it cost to package and ship? What is the average retail price? How much is the profit, and when will profit overcome production costs? You need to answer these questions to weed out bad ideas and only focus on good ideas. This is also helps push you to look deeper into an issue when you see someone else who seems to be doing the impossible. For instance, when I first thought about selling t-shirts or sweaters online it seemed ridiculous. Many of them were going for $10 to $20 a piece….but the wholesale sweaters I was seeing were going for $20 each at production. With Amazon taking another $10 to distribute, you’d need to charge more than $30 because otherwise why go through the effort? You also might not sell everything at $30 so you need to charge more to make sure you cover your expenses. But why would anybody pay $40 for a sweater when they can get a $10-$20 sweater online? They might if it’s a name brand – but my name is neither Nike, Under Armor or Adidas. I went on to compare domestic to international wholesalers and that’s when the truth became obvious: you could make money buying from China but not from U.S. manufacturers. This is why it pays to do your homework and know prices in a value chain from end-to-end.
Much like physics, force and velocity in business is dependent on mass. If you want to make big money, you need to put in big money too. You may be able to turn $5 into $10 or $20, but short of winning the lottery it’ll never become a million dollars. The reason why you need to invest a sizeable amount is because profits grow with scale, and risk drops. If you were selling a service, say remodeling kitchens, you can do twice the work in half the time if you could hire an assistant. You might be able to even do three times the work in a third of the time, and that’s when real money starts to be made and you earn profits you can use. Similarly, if you are buying wholesale goods you quickly realize that buying 500 units of something isn’t much cheaper than 1000. Even better – the break-even point where profit passes costs barely budges – meaning that more of that 1000 unit order is pure profit than the 500 unit! As you can see, the people who successfully scale up are the ones that really rake it in.
Starting a business has been both an exciting and frustrating experience so far. It’s wonderful making an idea come to life, doing research, and figuring out ways to make money selling a product that interests you. Dealing with state, bank, and other corporate bureaucracy has been less so. This next month will be even more interesting once I finally get my account set up with Amazon, purchase product, and get it ready for customers. Wish me luck!