In this section, we’ll be discussing the day to day operations of an e-commerce business. Beginning with the beginning, we’ll look at setting up your business systems, and move through time, money and inventory management.
We’ll have to deal with a little “accountant speak” and then I’ll show you an easy way to value a small business. We finish with the only real formula to determine the value of something.
The first time you do something new for your business, whether it is buying a domain name, or depositing receipts from credit card sales, write down each step as you complete it. This is your baseline. As you do the same things over and over, you accumulate little tips and tricks. You develop a process. Over time, you get better, faster and you eliminate unneeded steps.
This is your system for that task. Document it. Do it the same way each time. Why?
Keep everything in a binder, so you can change things as your business changes. We call ours the Operations Manual.
Yes, it is a pain in the butt. But if I got hit by a truck, someone else could step in and run things well enough until I got back in the saddle. Which leads us to our next topic…
While I am writing this book, I am only spending a couple hours per day running my main business. This is possible because I have a backup. Once your business is robust enough that you are pulling real money out of it, you should have one too.
Improperly trained backup
For me real money is $1,000 / month. That’s a nice little chunk. For you it could be more, or less – the point is, once your online earnings start to matter, protect them.
Take the person you trust most to take care of things and show them the basics. Make sure they know where things are, and where your Operations Manual is. Someone has to have authority to sign checks for the business as well. This does not have to be the person that runs it.
I don’t recommend giving authority to sign checks to anyone that does not truly care about you, unless their success is inextricably tied to yours. This includes your accountant and other members of your team. The only people that can sign checks for me are my wife and my son.
I know we all have our own way of doing things. My way means I always know where everything is. I never have to wonder what the status of a project is, or where that agreement went. IF that sounds good to you, read on…
Also known as the 80/20 rule, it is most often quoted when people are talking about sales or work items: 80% of your profit comes from 20% of your sales. 80% of the sick days are taken by 20% of the workforce. It holds true – sometimes it is not 80/20, it’s more like 70/30 or 90/10 – but for the most part it works.
It also applies to physical objects. You do 80% of your work with just a few software programs, you pull the same files out of the drawer over and over, you use the same websites, pens, etc.
This has an impact on how your desk, computer desktop and even your file cabinet should be set up.
Take a good hard look at your office area, even if it is just one desk. Clean it up. Put everything where it belongs.
Now for the rest of the day, make a note whenever you use something. Do the same the next day. On the 3rd day, take everything you haven’t touched, used or referred to, and put it in storage.
You don’t really use that stuff. It should be in a file drawer or a box somewhere, not on your desk, or within arm’s reach. Now take all the things you do use all the time and arrange them according to function. To give you an idea of what I mean, my desk is set up like this:
I am sure you get it – the stuff you use constantly doesn’t need to be put away. The other stuff is grouped in a logical fashion. If your desk drawers are a rat’s nest of rubber bands, hair clips and God knows what else, purge. You’ll feel better.
There are really just 2 rules: Everything has to have a reason for being in your work area, and everything has a place.
I bought a little Brother label maker and I use it all the time. I find that it just makes things look nicer, and I want to keep things more organized when they are nicely labeled. Machine labels are also a lot easier to read. Here it is on Amazon.
Label all of your file folders properly, and keep your labeling stuff together close at hand.
File folder labels should all run down the left side – not staggered, or in a diagonal line that cuts across the file drawer from front to back. When your labels are lined up and in some kind of logical order, you will find that you can actually get to the one you want more quickly. Do not do it the way most people do.
At first blush, it seems as if staggering the labels would be best, because it keeps more of them in view. In practice, it presents the eye with a confused, disorganized jumble, like this:
Do it my way, and over time you will associate the other folders around the target folder with it, and you’ll zero in on it. Don’t take my word for it – give it a shot and see.
Within each file folder, always put the last thing you touched in the front of the file. For instance, I have my customer files arranged alphabetically. Under “I” we might find Infinity, Intel, Io Systems, and so on. I don’t worry about the arrangement within the folder. Why? Pareto’s rule again. The last few things I pulled from that folder will likely be the next things I need as well, so they go back in the front.
Within a file drawer unless you arrange things alphabetically (like I do customer files) treat file folders the same way you do individual papers. The last one pulled goes back to the front of the drawer. Over time the folders you use the most will work there way to the front right where you need them.
Get Dropbox or a similar program and use it. I keep all the files for my current project in Dropbox, with a shortcut to the ones I use every day on my desktop.
Forget it. Time management as most people think of it is a myth. Setting aside blocks of time for specific tasks is a sure road to frustration. Something will always come up. There will always be phone calls, family emergencies, and so on.
Here’s how we set things up for maximum productivity and efficiency:
Step back for a moment, and think about all the things you do every day to run your online business. List them in a word doc or text file, in no particular order. (A whiteboard is perfect for this kind of thing too.) Now, pull out the most important things – these are the things you need to do. They go at the top.
Follow this with things you really should do if you have the time, and so on. Please resist the impulse to arrange things according to what you like to do. If I did that, reading blogs and playing with WordPress would be the first thing I did in the AM.
Now purge. For every item ask yourself: “Is this really needed? Do I have to do this every day to make sure things run smoothly?” If the answer is no, scratch it off the list. If it really does need to get done, but not every day, put it on a weekly list.
When you start work, begin with your list. Start at the top, complete each item and move on. Here’s what happens when you do this:
You’ll find that the most important stuff almost always gets done. Most days it’s done before 11am. The rest of the day can be spent putting up content, doing research, whatever. Here is ours, for what it’s worth:
We use Basecamp and Highrise to run things. You can use whatever you like, but please give this an honest shot. You’ll find that when you do the really important stuff first, everything else falls into place on its own.
Money is different when you’re selling product. This is one of the reasons that a lot of people shy away from it. When you get an AdSense click, that 58 cents is yours to keep. When the Amazon affiliate program sends you a check, it’s yours. If you don’t value your time and effort, it seems like it’s all profit. It’s not, but that is another topic entirely.
The good news is that it is not that hard to do. Like most other things, you set up a system, follow it, and things run pretty smoothly. Of course, it’s the 30-50% margin on each sale that really makes it worth the effort.
Selling product means that you have to buy product. So you will have invoices to pay. When you owe money to a supplier that is your Accounts Payable, or AP. You may want to actually pay these bills, so that they keep shipping product for you.
We’ll get into setting up your Supplier contracts properly in the Supplier section – but for now just remember that your goal is to get the money from your customers as quickly as possible, and pay your bills as slowly as possible without being late.
The ideal situation is for your customers to pay cash, and for your suppliers to give you 30 days to pay. That way you’re always liquid and you have money to do things like buy more stock when it’s on sale, or expand your product line. But none of this will work unless you do one thing:
This is what gets most small business owners in trouble. If you make the transition from a 9 to 5 job to full time internet sales, you have to nail this down from the very beginning. In the beginning, only pull out enough to cover expenses, and if you can, do not take a paycheck. Ideally you should have one month’s worth of expenses in your accounts at a minimum.
There are two ways to pull cash out of your company. (You did set up a real company to benefit from all the breaks corporations get, didn’t you?) You can cut yourself paychecks (safer). Or you can pull it straight out of the company as a distribution, or owner’s draw.
If you pull too much money out, your will find yourself short when your suppliers’ invoices come due. This is unpleasant for them and for you. Most companies are willing to give you some slack, especially if you keep the orders flowing, but it’s best not to test their patience.
It may feel great to be able to pull $5,000 out for a great week at the beach – but make sure you won’t be regretting it at the end of the month.
Exactly how this works will depend on what sort of legal structure you have, and the laws of your state or country. We set our companies up as Sub S corporations and LLCs. Please consult your accountant / attorney before deciding what works best for you.
Basically it works out like this:
When you cut yourself a paycheck, you take out FICA, state income taxes, federal income taxes, unemployment tax and so on. Don’t worry – any good accounting program will handle all of this for you, or you can have your accountant do it. It looks just like the check from where you work now. You have your gross pay and a smaller amount which is your take home pay.
The other way to get your money is with a draw. This is OK, it’s perfectly legal for you to pull cash out of your company and spend it on anything you like. There are consequences, though.
When you pull money out as a draw, there are no taxes taken out, and the IRS sees this as what amounts to a dividend payment or a distribution from stock.
You may be thinking “Awesome!”. Not really. You still owe taxes on that money. But only income taxes. No FICA (social security, workmans comp, medicare, etc). So you really do get to keep a lot more cash at the end of the year.
At this point you may be wondering why you would ever take a paycheck. With a paycheck, there are all of those deductions, and you have to send in tax payments monthly, etc etc.
Here’s why – If you take $100,000 cash out of your company, you still pay taxes on it eventually, but in the meantime it’s all yours. But if you take no paychecks, and pay no FICA, and you get audited…
The IRS can decide that you are avoiding paying your “fair share” into these programs. They will calculate what your fair share should be and they will send you a bill. With penalties and interest. It will be expensive. You’ll most likely have to hire an attorney, because the chances of you and the IRS agreeing on what a fair share is are slim.
So what is the correct proportion of cash to take out as a draw, and as paychecks? Is it 50/50? 80/20?
When it comes to this, the IRS likes to leave it up to you. They are happy to give you all the rope you need to hang yourself. There literally is nowhere in the code where they tell you what’s fair, or what the minimum is.
I’m more than a little cynical so I think they do this for 2 reasons:
1. If they give a number everyone will only cut paychecks for that percentage and take the rest as distribution or draw. This could reduce the total receipts for those programs.
2. By leaving it open to interpretation they can jam you if they want to regardless of how you take your draws.
So what to do? Safest is to take all of your money as paychecks. I try for a more balanced approach:
At the beginning of each year I log onto a few big job sites and look to see what my job is paying in my zip code. I pay myself that as a paycheck and take the rest as distributions.
If the draw creeps past 40 % I give myself a pay raise. Ironically, because of the increased withholding and my company matching some withholding payments this results in less take home pay.
This leads to really interesting question. What is my job? When someone asks me at a party, I just say I do internet marketing. I used to say “I sell stuff on line.” But this always got me “oh, you mean like eBay?” which is followed by “I bet I could do that.”
This made my head hurt, so now I just say I own an Internet Marketing firm. For the IRS, though, I hunt for the thing that most closely matches what I do. This year I used SEO Team Manager and Internet Marketing Manager to get a number.
If I get audited, will this work? Maybe. Check with your team to get the best strategy for your situation. However you come down on this, document your decision making process. Be sure that a reasonable person, while maybe not agreeing with you, could certainly understand why you did it that way.
If you want to be stressed out just ignore your money for a while. There’s nothing like not knowing if you can make your mortgage to get that blood pressure up.
Treat your business like a business. You are the CFO and the CEO. If you aren’t on top of it, who is?
Note: If your customers pay up front via Credit Card or Paypal, you can safely skip this section.
Your Accounts Receivable is just a fancy way of saying “The money my customers owe me.” AR is becoming less of an issue, even for companies like ours who do a mix of B2B and B2C. Thankfully, large corporations and the government are doing more and more purchasing with credit cards, reducing the need to track payments. But it’s still there, and will be for the foreseeable future.
The best way to keep on top of the money you are owed, or anything else for that matter, is to have a system. Again, your system for each part of your business is just the best way you have found, documented.
Here’s the flow for our AR after a dropship order where the customer gets Net 30 Terms:
What’s nice about the above is that everyone knows what is going on every step of the way. The customer knows their product shipped, they know you know they got the bill, and they know you know when it is due. This by itself will prevent most late payments.
Having a system and applying it to every order means no lost payments, no customers that didn’t get billed, and no miscommunication.
Your invoices should contain all of the information your customer needs to contact you, and to pay you. The goal of your invoice is to leave nothing to the imagination.
Billing address, shipping address, and all of your contact info, including fax, phone, email and associated website URLs should be there. Date of order, order number, what was shipped, price, how it was shipped and the tracking number should also be on this single form.
Don’t worry – Quickbooks, Peachtree and all the other small business accounting programs have this stuff built in. They include a number of templates that you can easily tweak to your preferences.
We have a few standard clauses we insert into our quotations and invoices in these cases, and I am happy to share them with you:
If you are in the B2B world, many of your customers will want Net 30 Terms.
Net 30 terms: the customer’s payment is due 30 days after they receive the product. This is not as bad as it sounds – many of your suppliers will give you Net 30 Terms as well.
We have clear requirements that have to be met before we extend credit to new customers, so we include this in our B2B quotations:
We offer Net 30 day terms. To establish terms, we need:
Your Purchase Order on company letterhead, along with your standard credit reference sheet. This normally includes one bank and three trade references.
Net 30 invoices paid within 10 days are eligible for a 1% discount.
We also accept all major credit cards, gov't purchase cards and wire transfers.
We also have special requirements that must be met before we will ship overseas, or even ship product that is destined for overseas:
Payment in advance is required for shipments outside the USA and Canada.
Payment via check drawn on a US bank or via Wire Transfer.
Receiving Bank Name: XXXXXX Bank
ABA Routing Number: 061894653
SWIFT Address (International wire) : XXXXXX4r
Account Owner: Grabapple Media LLC
Deposit Account Number: 23095989358
Bank Branch: XXXXXX Bank, Atlanta GA.
We do not accept credit cards, PayPal or any other method from overseas that doesn't put the cash in may hands before shipping, and is not irreversible.
Lots of other people ship to overseas addresses and take payment via PayPal or credit cards and say they have no issues with it. I find that it is not worth the risk for me.
If you are doing business or hope to do business with the US Government, you will need to put together something that will answer all the most common questions up front for your government purchasing agents. Here’s ours:
**** Grabapple is in the Government system. We accept government purchase cards, credit cards, direct deposits, and check payments.
**** Grabapple is a Certified Small Business / Veteran Owned Business
10567 Plank Rd
Frog Level, VA 22367
Fed Tax ID: 57-345516
CAGE CODE: 1RQG1 Status: A – Active
NAICS: 42183 Industrial Equipment & Supplies Wholesalers
Virginia Corp ID: 052546-9
Now this may all seem a little much – but these “snippets” evolved over time as different types of customers presented us with different questions. We used the system outlined in the beginning of this section and improved them each time we needed to add more info. None of them has changed now in several years – and it is a simple job to just paste them into forms, emails, etc.
FYI – All the numbers above are fake, obviously.
Many of the items in the Government Terms snippet are arcane – don’t worry, you’ll most likely never need them. If you do, and aren’t sure how to get them or what they mean, send me an email or a message on FaceBook and I’ll do my best to help you out.
If you are lucky enough to have a B2B business you’ll have to deal with this. Interestingly, the slowest payers are usually the largest companies. It’s not nice, but there is a logical reason for this. They delay payment two ways:
They send you the purchase order, and demand Net 60 or even Net 90 terms. Now you can always refuse the order, but turning down business from GE is not in your long term interest. They’re not just being mean, though. They’re being mean for a reason.
Money. Let’s say GE buys 50 million a month in materials and supplies. Let’s say they pay right way. That 50 mil is gone. Now let’s say they pay 60 days later. That money is on the books as spent, or at least earmarked for the supplies. But it is cash in an account somewhere.
Want to guess what 2 months interest on 50 million is? At .5% per month it’s about $50,000. This means that they’re getting some of what they’re buying free.
That’s the straightforward way. There are some other companies that do it another way. Their purchase orders say 30 days, but they just don’t pay on time. You can call, you can stomp your foot. But they usually say something like “We pay our small vendors on a monthly cycle. Your invoice is set for payment in 3 weeks.” Too bad it is already due.
There’s not a lot you can do, except make a note of this.
Then the next time they order call the purchasing agent or end user and ask for a credit card. Tell her straight up how they jammed you last time. Normally she will not like this – her payables dept. is making her job harder. In my experience, the PA almost always converts the order to a credit card, or flags the order as one they have to pay early.
*A quick note on phone etiquette here. You are trying to get something from somebody else. Be sweet. Here’s how you approach this:
“Hi, is this Mary Watterson? Great. Mary, this is Dave at Grabapple.com. First off, thanks so much for the nice order. We love our repeat customers – it tells us we must be doing something right… I do have a concern that I hope you can help with. See, the last time you placed an order with us……”
…and you launch into your story. Finish up with “So, I was wondering what we can do to avoid that this time. Could you maybe place this with a corporate card?” She may not be able to do that. But she will at least give you a great contact in AP so you can be on your money the day the product ships.
Mutual Misunderstandings will sap your company of energy, and force you to spend time putting out fires that did not ever have to start.
They arise all the time in larger organizations, where business operations are scattered across a building, a country or even the world. Departments duplicate effort, while important work goes undone.
There’s no excuse for it in a small organization. Now you may be thinking, “This doesn’t apply to me. I’m only one guy.” Sorry, that’s not possible. Not when you are selling product.
In my AR example above, there are at least 3 people in the loop: me, my supplier and the customer. Problems can arise when some person in the loop either:
Your supplier needs to know what and where to ship, and how it should go: UPS 2nd Day, Fedex Ground, whatever. Your customer needs to know when to expect the product, and to get confirmation of payment. You need to know that the product shipped, and that your customer received it.
Make sure that when you set up your systems, you add whatever steps are needed to keep everyone in the loop.
This may seem daunting at first, but most shopping carts and store systems have a lot of this built in. It will just happen automatically once you receive the order.
Hopefully you can arrange to have most of your products dropshipped. But there will be products where your suppliers insist that you hold stock. This isn’t as bad as it sounds. Sometimes, these are also the products with the largest margins. You find that you make so much money on each sale that you are happy to keep a few on hand.
Sometimes the minimum quantity they want you to stock is enough to last for a couple of months. Other times, you may sell a couple dozen of an SKU (Stock Keeping Unit – a number assigned to each product) per day and your needs fluctuate. Most sellers stock up to get ready for Christmas, for instance.
If you don’t hold enough inventory, you have customers waiting for product. This is a bad thing, the more so if they don’t pay until after they receive their items. Remember, you want maximize the flow of cash through your company. They may even cancel their order and go elsewhere.
The first time you order a product for inventory, it’s a bit of a guessing game. But once you’re shipping your widgets for a few months, you get a good feel for your needs. You can even set up a System to control your stock. Here’s a peek into ours:
Sales Jan-March for SKU G123:
Okay, so an average of 33 units per month. Now let’s say it take 2 weeks to get stock from your supplier. This time lag between ordering units from a supplier and receiving them is called “lead time”.
So, to cover your highest sales numbers, you need to always have 23 units in stock when you place a new order. This is because your highest month is 46 units / 2 = 23 units every 2 weeks. By placing your order with 2 weeks stock remaining, you can be sure that you won’t run out.
Most accounting systems can track your inventory, and you can set up an alert set at your re-order stock number. I take this one step further. I like to add an additional 10% as safety stock. So in the case above, I would most likely buy these when my stock dropped to 27 units.
Of course the example above is simple. Normally you want at least 6 months of data to work with, but you have to start somewhere. Your stocking order should also take into account how the product is packaged. If they ship 12 to a carton, don’t be the dork that orders 17.
Here’s an easy way to set up a simple Excel inventory calculator for your business:
Lock all of the cells except those highlighted above in grey. The cells in grey are your data entry cells. Here’s what to enter in the other cells:
Christmas! Yay! For those of us that sell consumer items, Christmas is always the best time of year. If you have been through one, you’ll have something to go on. If not, shoot for about 6 months stock if your item is a gift friendly product. Make sure you can absorb the cost if you overshoot.
You may end up with extra, and that’s too bad. But at least you have it there, and it will sell eventually.
It’s dead money. You have either already paid for it, and it is just sitting there, or you have to pay for it, and it’s just sitting there.
Your suppliers feel exactly the same way. That’s why they would prefer that you order large quantities. Remember, you have to pay them in 30 days, they don’t care if you hold stock for 3 months.
Always hold only the minimum amount of stock you need. Anything else will just tie up capital that you can be using elsewhere.
So why would anyone hold stock? The main reason is that you have your customer’s selection right there. You have total control over shipping, packaging, and follow-up contacts. This is really important on the internet. When your customer finds out that you can’t ship his widget, he’s off to the next site in a click.
Add to that the fact that most items are only in short supply – wait for it – when they are in the most demand (duh). If you are going to sell the latest Tickle Me Elmo you had better get them in stock before the Xmas rush. It’s nice to be the only guy who has something. A little foresight and planning can turn into some serious money.
You may also find that you are able to get better pricing by buying your product in quantity, or to get a close-out on a soon to be discontinued model.
Just a few observations here. I’ve bought businesses and put a few on the block as well. Bear in mind this is not my main area of expertise, but I thought it might be interesting reading and at least give you a different (skewed?) point of view…
Please note that title of this section is valuing your business – not valuing your website.
First off, know that to the impartial investor, a small business is a risky investment. She will accordingly expect a high rate of return, at least 20% and maybe even 25%.
So if she pays you $100,000 she will expect to earn between $20,000 and $25,000 per year for a 20% to 25% rate of return.
The key here is to understand what is meant by “earn”. This does not mean that the business brings in $25,000 per year in sales. It does not even mean that the owner / operator makes $25,000 per year. Remember that she is looking for Return on Investment.
She expects to net $20,000 - $25,000 per year AFTER paying all expenses – including the salary of the business manager/operator.
This is real passive income, and what the business investor is after.
Now there is a second scenario – where someone is essentially buying a job. An example of this is the person that buys a restaurant planning to run it themselves. They may be willing to take a smaller payback %. After all, they will get the $25,0000 return, plus the $35,000 they pay themselves to run it.
The wise business buyer will want to take a look at your financial records, employment records, liabilities both short and long term etc. The final number she comes up with will be less than you want, most likely.
In fact, there is a simple way to calculate what everything you have is worth:
Your item for sale is worth what the buyer you can find is willing to pay on the day you sell it.
That’s it. Not a penny more. Note that this doesn’t say anything about how much work you put into it, or what you think it’s worth. And it absolutely has nothing to do with what you paid for it.
Next up: Products – How to find them, how to deal with those who have them and how to figure out if you want to stock and ship them.