I opened my first shop on Etsy in 2007 and after many successful years I switched my product line enough to warrant opening a second shop. Now I’m starting up a third! The “Why” behind managing separate shops is for another story. In this article I want to share with you a practice to employ to protect your business. I owe part of being successful to being prepared to handle the unexpected without interrupting my business cash flow.
Today’s Tip – Everyone knows the age old adage “You have to spend money to make money”. But what if you don’t have the money to spend to take advantage of opportunities or respond to problems as they arise? Well let’s tackle that one first, building your primary reserve.
I’d be the first to admit that the first year was the hardest. You have all those start-up costs and very little cash to work with so when you make that first sale it’s time to celebrate, right? Absolutely! Reward yourself but don’t get too crazy. Now is the time to get into the practice of taking part of that sale and putting it aside to build your “primary reserve”. How much? I suggest 10% of the sale (Not including taxes or freight collected). Depending on the products you sell, this could be pennies or it could be a few bucks per sale. In any case, put it somewhere safe and separate from your regular working account.
In the beginning that primary reserve account will not have much in it, but the point is to build it slowly over time. Feed the account, a little bite of every sale until you hit your target reserve amount. What has worked well for my Etsy business is striving to always have a reserve available that equals 10% of my annual sales. So, if you sell $1000 of stuff a year you should strive to have at least $100 on hand in primary reserve. When you increase your success to $12,500 per year you should strive to have $1250 on hand and so on. Believe me, you won’t miss that small 10% when socking it away. But you will miss having that reserve on hand when you really need it, and you WILL NEED IT.
As your first year of building that reserve progresses you can adjust how much to sock away to hit that end of the year reserve goal. If your goal is to have 10% in reserve, stashing away 10% of each sale will organically get you to your goal. This will be an exercise is self-control to resist the temptation to dip into what you have saved up, but look forward to year two when things get a lot easier. That’s when you can scale waaaay back on what you are skimming off the top to set aside which equals more money in your pocket from profits to spend as you need or want.
Year 2 – Congratulations! You successfully built that reserve, but why? We’ll get into that in a second. For argument’s sake you let’s say you sold $2100 worth of stuff in that first year and you now have $210 in reserve, yeah! You can stop socking away portions of each sale and keep that extra smidge of money to do with whatever you wish. Or, you can continue to squirrel away that 10% and give yourself a reach goal by creating a secondary “Spendable Reserve”. What is a “Spendable Reserve”? These are funds that you give yourself permission to spend on whatever you wish without hurting your business. Preferably spend these funds on something that benefits your business like a new tool, upgraded computer or even a faster internet connection for your home business. Whatever you save up in the “Spendable Reserve” you can shell out without the worry of depleting your primary reserve. But what happens when your sales increase? That’s easy! Evaluate your sales trends and project out what your annual sales will look like at the end of the year. Then plan to sock away smidgens of each sale to meet that new year end primary reserve goal. This can be as easy as continuing to take 10% off the top and putting half to your primary reserve and the other half to your spendable reserve. Your savings habits haven’t changed but you are still accomplishing your reserve goals.
Now on to the “Why?”. When I have given out this tip in the past I get these regular responses: “This is my primary source of income so I need that money to live.” Or, “I worked hard on my business and I should be able to spend the full amount of the profit as I see fit.” Both of these are very valid and real responses. To these I come back with “Don’t you want to protect all your hard work building a business and future income streams that can come from it?” It would be a shame to have to close shop due to missed opportunity or even worse, an unforeseen hurtle.
Having a primary reserve on hand serves two main purposes. First, to cushion the blow when something goes really wrong that can stop your business in its tracks. Things like having to replace a major tool needed to manufacture your products. Or having the computer for running your online business blows up. There can be any number of things that are critical to keep you either making or selling your products. Having the funds on hand to correct a major, business stopping problem and getting back on track and selling as quickly as possible is something you’ll be grateful for when you need it. There is not much worse than being shut down during the holiday shopping season or when trying to fulfill a major order with no resources to get going again.
The second purpose of a primary reserve is being poised and ready to grab onto any major opportunity that may come your way. Here is one of many scenarios: You get a convo message from a customer that loves your work and wants to purchase a large quantity of items. Way more than you have available or even have the supplies to make. It’s going to be nice to know that you have $$ on hand to purchase additional supplies without hurting your cash flow. I can’t tell you how many shop owners I have seen in the forums complaining about losing a substantial sale because they could not meet the needs of the opportunity presented due to lack of available funds. (Getting payment from a customer either before or after a custom order or substantial sale is another topic altogether)
Lastly in regards to building your primary reserve, make sure you maintain it! If you do dip into the reserve to recover from a business stopping disaster, make replenishing it a priority. Even if that means forgoing a larger chunk of your profits from subsequent sales until you recover. In the case of utilizing those reserves to capture an unexpected sales opportunity, take the profits from that captured sale to replenish the reserves. (And maybe sock a little extra away into that Spendable Reserve) You should have made more than enough from the sale to cover what you needed to purchase the materials to make it happen.
Note: Even if you have been selling on Etsy or elsewhere online for a while, but don’t have any reserves, now is the time to start. You will be at an advantage compared to a newbie since, hopefully, you have already covered your startup costs along the way. You should have a larger pool of profit funds to pull from to sock away and build those reserves.
Protect your business people! Worst case scenario, you have built a cushion that can save your business. Best case scenario, you have a nice little bonus to cash out when you decide to call it quits or if you are really successful, sell your business to someone else.