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How to Calculate your Profitability
Make money, make money!
No one goes into business hoping they don’t make money – making money is the most important goal of any business. Since it’ll take time to make profits as you build a new business, there are many factors you should be aware of from the start to ensure profitability is around the corner and not years down the road.
As a reseller, and being a buyer yourself, you should already have a firm grasp of the fundamentals from when to source certain products, knowing the products currently in demand, understanding how to keep overhead costs down, knowing where to source for the maximum margins, etc. Given these factors, and so many others, how does one truly know their profitability? Let’s find out.
ORGANIZE YOUR COSTS: As with all efficient businesses, organizing your costs is a fundamental utility to ensure your company grows at the right rate and your profits can be closely monitored. While there are many great software systems out there to help keep you organized, you can always start with a basic spreadsheet.
Start off by documenting all of your expenses on a monthly basis since your costs may vary over the year given the retail seasons. This would include membership fees, storage fees (if applicable), sourcing fees (Buyer’s Premium, Shipping Costs, Lot Price), and selling costs such as shipping, advertising, etc.
Next, outline the maximum you should be spending by each month – again knowing each month will be different. Everyone knows the Holiday season stretches from October to December, so reflect slightly higher spends in September through November to ensure you have enough product for the demand that will undoubtedly follow. These numbers aren’t set in stone, and they should be reviewed on a consistent basis to ensure they make sense.
PRO TIP: In addition to organizing your operating costs, also organize all your product costs. As you process your merchandise, log into your system what you paid for it (including the shipping and any additional fees), and what it ultimately sells for and what channel you sold it through. This will become a great guide for future listings when you get the same or similar items to list. It’s like your very own cheat sheet for where to list and how much to list it for!
KNOW YOUR SEASONALITY: In your first year of business you may not be able to account for all the seasonal trends with merchandise, however, documenting your first-year sales will afford you the ability to be better prepared for future years. Knowing when to sell an item for the most profits will allow you to source that product weeks in advance in the next year in order for you to increase your profits more easily than trial-and-error.
FORECAST COMPETITION: Contrary to the above, there are ways to foresee seasonality of certain merchandise, by seeing how much of the product is currently being offered by other resellers. Take 2017’s phenomenon of fidget spinners. This was all the rage, and everywhere you looked – online or in stores – this product was being offered in a variety of colors, shapes and even sizes. For a brief moment the supply met the demand, and very quickly the supply was more than the demand.
When a certain product is flooded on the market, with smaller amounts of demand it can be quite difficult in order to move product. So difficult in fact, that many sellers either took substantial loses in order to liquidate their stock, or they still have the inventory with no way to sell. Both detrimental to the profitability of a business.
KNOW YOUR WORTH: Ever hear the saying “your worth in gold”? Well, your time is very valuable, and while a lot of it goes into starting a business, in order for it to be profitable in the long-run you need to account for it as an expense. Track your hours, track your efficiency – you may just learn that you could hire someone to handle most of the work and pay them less than what you’d incur if you did it yourself. This opens the door for you to work on bigger things to continue the company’s growth and (dare I say) hire more people!
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