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Saturday, May 19, 2012

The Business Chat - Playing with numbers

Every Christmas my friend (let’s call her Karen) makes truffles. Really, really, really good truffles. The sort of truffles that we dream of all year round. Truffles so good that the recipients beg her to sell them, “you should go into business making truffles!” they cry as they devour those delicious little morsels.

I’m sure you’ve heard this cry too from your friends and family. You make something that is really good, everyone loves it, and they are sure that you should be in business. And why not go into business doing something you love? Just think, you could make your art/craft all day long!

Fortunately Karen is smart enough to do a little thinking before setting up as a truffle maker. First she calculated how much it costs to make each truffle. As these are gifts she uses the best ingredients to make the best truffles she can. You can taste the difference. It means that the truffles are expensive to make. Each truffle costs her $2.50 to make.

Second she looked at what people are charging for truffles. High end truffles sell for $2.50 - $3 each.

Third, she calculated how much profit she could make per truffle.

Income – Expenses = Profit
$3 - $2.50 = .50

Now, she is buying her ingredients at retail cost and if she were making these as a business she could cut the cost by buying in bulk at wholesale prices. She thinks about using cheaper ingredients but decides that they just taste cheap. She investigates wholesale costs and reworks her numbers.

$3 - $1.50 = $1.50

Hm, the $3 truffles at the other truffle store are a lot fancier that the truffles she makes. She realizes that she will sell her truffles for $2.50.

$2.50 - $1.50 = $1

OK, so if she buys her ingredients in bulk, she can make $1 profit per truffle.

Now Karen isn’t an extravagant girl. However she does have a mortgage and does need to pay her bills. To live a decent life (and replace her current regular secure paycheque) Karen needs to make $750 per week. So Karen needs to sell 750 truffles a week.

Oops, see a problem? There are all sorts of other business expenses other than the cost of making the product. Karen will need to rent a commercial kitchen, have packaging, marketing costs, a car to deliver the truffles and buy space at food shows. Adding in all these Karen realizes that she would have to sell 1500 truffles A WEEK to make a living. That is a lot of truffles. Making them would take a lot of time and then there is that little issue of actually selling that many. How, she thinks, is she going to sell 1500 truffles every single week of the year?

When faced with even preliminary numbers Karen decides that much as she like making her truffles it is not a viable business. When her fans holler for her to start a business she asks them if they are willing to buy 1500 truffles a week.

Just because you can make something awesome doesn’t mean that you should turn it into a business. Do your numbers before you quit your job.

Here’s your homework. Somewhere in your brain you have a number, the amount of money you would like to make from your business. I know we’ve talked about how this is your art and your creative soul and you do this for more than money. Reality check is that money is not dirty, it is necessary and if you are to stay afloat you need to make some. I know that not everyone is talking about a living wage from their craft. Some want to cover their costs so they can make more, and some want a lovely 4 months vacation.

Take your number. What is your profit per item that you sell? Average this out. Now divide your number by your average profit and that’s how many things you need to sell.

How does that number feel? Doable? Is this realistic? Does it make you want to run and hide in a corner? 

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