“Can Soapmaking be a Profitable Business”, presented by Paul Clough, C.P.A.
CAN SOAP MAKING BE A PROFITABLE BUSINESS PAUL CLOUGH, MBA, CPA, CFP I wanted to talk about something that would tie into the program of the soap marketing, where Derek bought the soap from you ladies and he is going to try to market it now on the internet and try to promote your business so that you can make more money, because ultimately most of you want to make money. Who wants to make money? This is a good thing and now we want you to spend more money so you can spend more from Essential Depot. So I wanted to look around and see what was out there for businesses that I could talk a little bit about and show how big you can get. I found that in 2011, Ink Magazine featured soapmaking as one of the 11 businesses you can start and make money at and do it out of your house and they featured Dennis Anderson, who started a soapmaking business out of his apartment, didn’t even have a house. He started out of his apartment, got so big that eventually he bought a house and moved to the house and he still tried to keep it a home business. Eventually I think he had to go out and get at least a small warehouse, but he was featured as an Etsy crafts master and he has gotten to be a pretty good sized business. I think he started in 2007 and along the way he got married and he had kids and he still kept the business operating out of the house. Now you folks can do the same thing or you know if you are not comfortable in using your house you can rent a small place and operate it out of, you know, a small warehouse thing, but it can be done. When somebody like Ink Magazine features it as a business to start, that’s pretty good endorsement. This is another business that features hand-made products. Now the sign says fresh-handmade cosmetics but if you go in there, now there is one of these over at the Brandon Mall and they are all over the country, they have several hundred stores, and they are in malls and they feature hand-made products and some of them are hand-made soap. So this is another, now I don’t know whether they make them all themselves, they don’t say it on their web site, but I suspect that they probably buy it from local craftspeople like yourselves rather than try to make it all themselves. Paul Okay, now the thing is that if you want to expand, if you want to get bigger. Now some of you may not want to, some of you may just want to be the small, operate out of your kitchen, make soap for the small stores, craft shops and so on and that’s great if that’s where you want to be. Some of you may want to go on a bigger scale. In order to do whatever it is you want to do though you need to have a map, you need to know where you’re going to go, you can’t just get some place without having some kind of a compass. You need to know where you’re going before you can get there. So you have to understand how to be successful, how are you going to get where you want to be, whether it’s crafting soap on a smaller basis but a finer type of product to crafts shops and so on, or you want to produce more and sell it on the internet because typically when you are talking about the internet like Derek is doing here, you’re talking about bigger volumes, you’re not talking about selling a hundred bars a month, you are talking about selling a thousand bars a months. So you have to keep that in mind when you’re thinking about where am I going to make this stuff, am I going to make it out of my kitchen, am I going to keep doing it by myself, what am I going to do? So, the ultimate thing though is you want to approach your soapmaking as a business. You can’t just operate it out of your pocket, take it out of one pocket and put it in the other pocket. Everything is cash, you don’t try to keep track of anything. You know you come over here to buy stuff from Essential Depot, you pay cash for it, you’re not operating as a business, you are just running a hobby. In a few minutes I’ll talk about the IRS’ view of a hobby. You need to think about setting up as a business. I know a couple of you have already or planning setting up separate entities or corporations, LLC’s, whatever it is. My favorite star over here is already incorporated, so you should really think about that because a separate entity like that does a couple of different things for you. There’s tax advantages to it, and there’s liability advantages because you’ve got to remember if you are putting a product out there and it is you personally, you are personally liable for that product and if it does something that you don’t think it should be doing, if it burns somebody’s skin, you’re personally liable for that. So you need to really consider having a corporation to kind of buffer your personal assets from the business. You need to have some business skills or you need to work with somebody who can help you in the business skill area whether you have an accountant that keeps the books for you or you have a really good friend that will sit with you once in a while and talk about business and talk about what you should be doing and how you should be doing it. How many now use an accountant to help them in their business? You should really think about it even if you go and get QuickBooks and you try to do all of the accounting or bookkeeping yourself. QuickBooks can help you but QuickBooks never went to school for five years, it didn’t get an MBA degree, it didn’t get a CPA and it hasn’t worked in business for all these years. So you should really think about getting somebody that you can talk to and work with that’s going to help you along the way. You need to have somewhat of a product range. You can have a single product, but you’re not going to expand the business that much if all you have is one product. You need to be to be able to try concentrate in the area, but you need to have several different products in that area. And of course you all know that tools and work area, just look in Essential Depot you’ve got the molds, you’ve cut the cutters and so on. Then you need to think about where you’re going to sell your handmade soap and this is one of the things that Derek is trying to help you with the pilot program is expand your business on the internet so that you are going to be able to sell more soap and that’s going to help you expand the business. The thing with the internet is typically you’re not going to be able to sell it and get the same price that you’re getting in a small local craft shop, but you’re going to sell bigger volumes. You need to think about pricing your product and that goes to where you are selling it because you can’t price it the same if you’re selling on the internet as opposed to selling it at a local craft shop and managing your business goes with the business skills. You need to think about managing your business, you can’t just think your business is making the soap. You’ve got to manage the whole thing, you’ve got to manage the marketing end of it, where you’re selling it, how you’re selling it, how you’re going to deliver it, keeping soap in stock, because if you happen, I mean if you get a product out there that all of a sudden gets to be a good seller, you need to know how to pick up on that and get it restocked because you don’t want to miss out if one of your products gets to be really in demand, you don’t want to miss that demand, because if you do, you just throw away a golden opportunity. So as I said earlier, the big decision you really have to make is do I want it to be a hobby or a business. Some people that’s all they want is just a hobby. That’s fine if all you want to do is make a few batches and you want to sell them but you don’t really want to kill yourself. Okay, that’s your decision to make. Other people want that business, they want to do $10,000 a month; but again you have to plan how to get there. There is a psychological block against success. Almost all of these people that go out and they do the seminars on success. They will tell you anybody can be successful. Anybody that wants to can go out and be successful, but you’ve got to want to do it and you have to know that you can do it. You’ve got to overcome that psychological block that’s preventing you from being successful. That’s the number one thing that’s going to keep you, “Oh I can’t do what Lush does”. Well no, I mean they started with one store, they didn’t start with 100 stores. They started with one store and you have to start with a small line, but if you know what you want to do, you have to keep just promoting it, you have to find that niche that you want to go into and you keep expanding. You decide you want to operate out of the house, some people that’s great, that’s what they want to do, they want to be able get up and their still in their pajamas, they can go make their soap and that’s how they like to operate. Other people, hey they’ve got to get up and go to a different location and that’s the mindset they have to take in order to focus on what they’re doing and everything here is focus. If you don’t focus on where you want to go, you’re not going to get there. So you need to focus on what it is that you’re doing. Another aspect if you want to be in business you should be registered for sales tax. So number one that allows you to buy from Essential Depot without paying sales tax and then if you sell to someone you need to collect a sales tax unless they’re registered. So it’s just an indication of how serious you are about having a real business. Question: Where do you register for sales tax? Paul: Well, you go right on line to Sunbiz.org. Corintha Peeples: Well what if you not from here. Paul: What state are you from? Corintha Peeples Maryland Paul: Every state has a Department of Revenue and that’s where most of the states have their sales tax operation out of is the Department of Revenue. Florida has the Florida Department of Revenue and they have a specific area. Sunbiz.org or myflorida.com/DOR, Department of Revenue and you go there to sign up, but in other states they are going to have the same kind of thing, it’s not going to have the same exact name obviously, but it is probably going to be the Department of Revenue. Now, even if you have a hobby, this is all I want to be, I want to have a hobby, I want to enjoy myself, I don’t want to have to worry about this other crap, I just want a hobby. Well IRS says guess what, you still have to worry about all that other crap because if you make any money we want our cut. If all you do is lose money, you can’t deduct anything with a hobby. The IRS rules all revolve around whether your business is a hobby or not and their criteria is if you lose money all the time, you’re a hobby and you can’t deduct anything. If every once in a while you make a profit, everyone once in a while every three out of five years, if you make a profit, then basically everything is deductible, but if you don’t make a profit ever, if all you do is lose money. I mean all most of these rules they have come up with revolved around two or three businesses. One of them was horse raising. If you have a horse farm, if you have a horse racing operation and you never made any money at it, you’re never going to deduct. You’re never going to be able to deduct anything. They have more criteria then just the profit motive, but I’ll focus on that because that’s the most obvious thing. But if you’ve come up with a business plan and you have established a program to produce soap and you’ve come to events like this, that’s all showing an intention to make a business out of it. Even if you lose money for the first couple of years, that’s all going to show that the intent is to make a profit and that’s the bottom line criteria for the IRS is are you trying to make a profit and then it becomes deductible. But if you’ve got a hobby and that’s what you want, then you can’t deduct anything but you do have to keep track of what income you’re making and you have to report it if you make a profit. Now I previously talked about the different business types, so I’ll go through these pretty quickly. The old and the original type is the sole proprietorship. You don’t have a separate entity set up, it’s just you, that’s it. The problem with that is if you make a profit you’re going to pay payroll taxes on that profit and you are personally liable in that business type. If you have a partnership, a partnership is just basically two sole proprietorships that joined together to do business. To me, the partnership is like the worst possible thing you can do because in a partnership, the two partners, or three partners, or four partners, however many it is, each one, individually, jointly and severally are liable for all of the liabilities of the business. So you make some soap, it burns somebody’ skin, you may not have anything to do with making that particular batch of soap, your partner did it, she had a hangover that day, she makes a batch of soap and she forgets, she puts in too much lye, it ends up coming out and somebody uses it and it burns the skin; you get sued. She has no money. So they go through all the partners and you’re the only one with money. You’re the one that they are coming after. So partnerships are not a good idea as far as I’m concerned and there are other reasons, but I have had people come in to me and they want to do a partnership and I talked them out of it because it’s just not a good idea. Corporation is just a separate entity. It is its own being, it is not a person, but it is a separate identify from you. “S” Corporation is a corporation with special tax advantages. A limited liability company is the newest type of entity, it really has no tax approach itself. The IRS never set up a tax form for a limited liability company. When you set up a limited liability company, the IRS is going to try to slot you into either a sole proprietorship or a partnership, you don’t want to do that. If you set up an LLC, you need to decide and you should probably be an “S” corporation. Listen if you let the IRS decide, IRS is out to collect money, they are not out to do the best thing for Julie, Michelle, Phyllis or whoever it is, they are not looking to do the best thing for you they are looking to do the best thing for the government. Now, when you start a business and most of you already have a business started, but maybe you aren’t right now focusing as much as you should be and that’s what you need to do, you need to focus on the business. If you want to expand it, now if you just want a hobby that’s fine, but if you want to expand the business you want to make it into something bigger, you’ve got to focus on it. If you don’t focus on it, you’re not going to get where you want to go. Select a niche, no one can be successful if they’re jumping around into different things. Today they’re going to make some of this soap, tomorrow they’re going to make some of this soap, next week they’re going to make something else because either they can’t decide what they want to do or every time they come out with something they don’t think it’s selling well enough, so they come out with something else. That doesn’t sell well enough so they jump someplace else. Nothing is ever going to sell well enough if you don’t #1, give it a chance and #2, and decide what you want to do. Basically you have to come up with a unique selling proposition. Julie over here came up with the name “Filthy Nurse Soap Company”. Well, she is going to have a variety of soaps under that but the name is catchy, somebody may buy the bar of soap just because its got a cute name and a cute logo, but you got to have something that’s going to attract attention and maybe it’s the charcoal activated soap, you’ve got to have something that’s going to attract attention. If you have a niche, you need to have a product line in it, but it should be fairly tight around that group of products, that niche that you have picked. If you can come up with that niche, and you develop a nice product line, you need to try to develop the market for it as opposed to trying to compete just on price. If you look on the internet, you are competing on price for the most part. Yeah you know there are some people who look at products and they will buy something because it appeals to them and they don’t really pay attention to the price, but most people when they’re on the internet if they find something for ten bucks, they are going to look around and see if they can find the same thing someplace else for seven bucks or eight bucks. They’re not just going to buy it for ten. So you should try to develop your product market and name your price rather than just trying to compete on price. And I’m not saying that you shouldn’t be on the internet because you’re getting a much broader market there. You are getting your products out to a much, I mean if you are in a local craft store or consignment shop or you know one of those types of places, you only have such a small market that you’re appealing too. When you go on the internet you have a much broader range that a senior product seeing what you have to offer and that expands your potential for sales in stores. Now these are a few different niche opportunities that I looked at. I’m not a soapmaker myself, so I don’t know although a few of you have threatened to make me to become a soapmaker, but vegan soap, I don’t know what’s involved in making vegan soap. There is a market out there for it apparently. Goat milk soap. I know we had, I don’t think she is here this time, but we had somebody upstate that had a goat farm right and that was one of her products, was goat milk soap and I think somebody makes one of these items out of goat milk, wasn’t it, do you use goat milk all the time on a regular basis. Group: Vegan soap, nothing at all in the soap not even honey. Vegan is no animal products at all. Paul: No animal stuff at all? Group: Nothing, not even honey. Paul: No honey? Okay. Castille soap, olive oil soap, insecticidal soap, I know my wife was on the internet one day and she said and she was looking at these products on how to get rid of insects and she raises orchids. So she would like to get rid of some of the pests that you get around orchids without having to spray them with a lot of these deadly chemicals. So you may be able to find some products that you can make that will lend itself to that kind of use. Acne treatment soap, shaving soap, you know for years men they only used the pressure cans and stuff like that. Now my son goes to a shop where they use the old fashion soap and they brush the soap on and actually use an old fashion razor and all that, so you know it’s like their going full circle going back to that, so you may think about something like that. This is one of the products I found out there that Julie told me about “Dope on a Rope”. This is like the perfect example of a niche. These people created a mold in the shape of a marijuana leaf and they put it with a rope, it’s made out of hemp oil and eucalyptus, peppermint oil and scent, I guess, and this is one of the products and they still market it now. They have a whole line of products though on ropes. They have some that looks like fish, I assume they don’t smell like fish but they look like fish, some other animals. There is another soap that looks like citrus. Soap cupcakes, I don’t know some of you may already make some of these. Do some of you make soap cupcakes here? Yeah. And these are soap pinwheels. Anybody ever make any of these? No? I assume that what you do with this is you lay it out in a pan and then you kind of roll it up. Elsa Like a jelly roll. Paul Okay, you should when you’re getting started, you should make some financial goals for yourself. You should at least have one year in the future. It would be better to have three years, but you should have at least one year. What do I want my sales to be this year and how am I going to achieve that. You can’t just say “Oh I want to do $100,000 this year.” How are you going to do $100,000, who are you going to sell it to, what are you going to sell? The whole advantage, the whole benefit to you of doing something like a business plan is to get you to think about what you’re doing. It’s not that you’re hit those numbers exactly. No one ever hits those numbers exactly. Big corporations that have hundreds of guys in the back room keeping track of this crap never hit those numbers exactly. But, the benefit is it makes you think about what you’re doing. It makes you think about how you’re going to make these sales, who are you going to sell to, are you going to sell it on the internet like with Derek, are you going to sell it to craft shops, what craft shops are you going to do, how are you going to market it. So that’s the advantage to you of actually sitting down and doing a business plan. Like I said you should do at least one year in the future. My preference is to see people do three years and every year you are going to revise the three years because let’s say you make a three year plan and the first year you double your sales. Well then you’ve got to revise the other. You should always a moving three years because the year that you’re in is going to then change what you’re doing in the future. These are the basic parts of your business plan, your sales, cost of goods sold, that generates your gross profit and then you’ve got your expenses, your overhead, insurance, rent, payroll if you have employees, payroll taxes and so on. I would urge anybody getting into it, to do a business plan because what I said is it makes you focus on it, it makes you think about what you’re doing, it makes you think about how you’re going to get there. Now profit margins can be a little bit difficult for some people. You got to remember when you’re doing profit margins that the smaller you are, the thinner are going to be your profit margins because there is a limit to what you can charge for a bar of soap. Just because it costs you $8 to make a bar of soap, partly because you are making it in small batches, that doesn’t mean that you can go and charge $18 for that bar of soap, or $15 or whatever price it is you want to charge for it because nobody is going to pay it. Who the hell is going to go buy a $15 bar of soap? Group: Yes they do. Paul: Yes, but you’re not Lush. Paul’s answer to a question Okay, but how long she been around, did she do that from the beginning or now that she’s started she’s got a market for it. I mean Lush can charge that now but they have hundreds of stores and people know who they are and they believe that this is all natural products and so on. And they have to charge it because they’re in the mall and they’re paying those high rents. Typically the smaller you are the smaller your profit margin is going to be because you’re making smaller batches, you’re paying more for the raw ingredients because you know the if you go buy, the bigger you order with Derek, the better price you’re going to get. If you buy a 50 lb. cube, it’s cheaper than buying 10 lbs. Dave: About 4 years ago, there was a lady in Alabama and she was making claims that didn’t make any sense. She was bragging at the show that everybody there was crazy because they were selling their soap for from $3 to maybe $6 - $7 a bar. She was trying to getting $16 - $18 and even $24 a bar and claimed to be very successful at it. I can tell you she isn’t in busy because the claim she was making and the amount she trying to charge for the soap it didn’t work so she’s not in busy anymore as a result of her silliness and her prices. Paul: You know everybody’s time and effort is valuable, but you have to realistic in what you’re charging out there. If you try to do pricing like Dave just talked about you’re just not going to have a very easy time of it, it is going to be difficult. Now, look down the road two or three years you may have gotten a following and you can raise your prices more but by that time you have expanded your sales and you probably don’t need to raise your prices because you are now buying cheaper and your gross profit has gone up because you’re selling more of the product, you’re spreading your costs out and now you can make more money. You know now it’s kind of like a double edge sword, you’ve got to raise the sales, to raise the sales you can’t overcharge for the product. If you overcharge, you’re just going to kill yourself. Okay, one of the things you should shoot for is coming up with the unique selling proposition, a unique selling image. When Julie came to the first retreat. Now, she is a nurse, you work in the neo-natal right? So she came up with this idea of “Filthy Nurse Soap” and you had somebody come up with the logo right, you gave them the idea and they drew it out and they gave them the idea in general of what you wanted. Didn’t you actually have somebody to the logo for you? Julie: I gave him the idea. Paul: He did a pretty good job along those guidelines. Now obviously each of you isn’t going to come up with the exact same logo, but you should all try to come up with some kind of unique image that you can put out there because if somebody tries you soap and they like your soap, you want them to be able to see that logo the next time and they’re going to try that soap again, whether it’s the same product or you’ve got a different product out there but they see the logo and boom, they are going to try it. Just having your name on it isn’t the same thing. That’s why when you go to Publix, you see Nabisco’s logo. They just don’t have Nabisco on the back of the box, they got a Nabisco logo on the front. Like Coca Cola has Coca Cola logo on the front of it, they don’t have it hidden some place, you know, on little print on the back; so you should try to come up with that unique selling image. I know a couple of you when I was doing the checking in on the soaps for the soap marketing pilot program, some of you got some nice names for what you’re trying to do and you should kind of expand on that whether you got to pay a few hundred bucks to somebody to come up with a logo for you. Think about it because in the end that’s how you’re going to get your product out there and get people to recognize it. Julie: Is talking but I couldn’t understand what she was saying. Paul: If you want to spend a lot of money you can. There are plenty of guys out there that will take your money. But for the most part it’s not as expensive as you think. This goes back to the psychological mind set. If you think it’s going to be expensive, it’s going to be. That’s if you ever get to the point of trying to do it, but if you get into that psychological mind set of “Oh God I’m not going to do a logo, they are going to charge me $1,000 to do the logo and all that.” No, if you look around, you can find somebody, just like Julie did that will do it as a reasonable price. Now Julie did 500 bars of soap for the pilot program and she did it out of her kitchen at home and some of you, you did 473, you guys did 500 each right? Okay, you did 1000 bars in total, 500 bars each. I know other people made smaller quantities, but we do have a number of people that did the whole 500 bars. Now this was Julie’s basic recipe and she used the SoapCalc. Now towards the end of my talk I’m going to bring up the SoapCalc again and there’s a couple of things I want to go over it with you, but she used the SoapCalc. She went through the whole soap calculation spreadsheet for each batch and to me this is an indication to me of how serious you are about doing it. I think most people did use this, might have been 50/50, but some people use it and some didn’t, but you should think about if you’re serious about it, you should be using some kind of a formula like this. If you do it on your own, you develop something on your own, that’s fine, you know develop on your own, that’s fine, but you need to have something that’s going to tell you this is what my soap cost. In reality, not let’s see, “I think that’s worth $1.00, and that’s worth”; no, you have to calculate it out and figure this is what the real cost is and then this is what I can sell it for. So you know in the calculation you come down to the package price. You’ve got something in there for labor. Now you can put in something in for the packaging, now most didn’t on the pilot program because Derek was using his products, I think we got some here. Now you may have a container like this, you know I’m sure Derek found it some place and you can look around and find the same kind of thing. I think some people wrap it in something like saran wrap or something like that. This is pretty easy and if you cut it and I think the cutter is set up so it fits right into this container, so you have to be careful. If you’re changing the recipe, if you’re pouring a taller mold or something, you could end up where you don’t fit. Now down on the bottom her calculates the material cost per bar. Now I think the last time Susan sent you all a copy of the spreadsheet. You should keep the original spreadsheet some place and not ever touch it, don’t alter it, just leave it the way it was created. You pull that up when you’re ready to do cost and you’re going to save it under a different name. So you are going to save it in the name of the product that you are making. You are going to save it as “Lemongrass”. So you are going to save the spreadsheet as “Lemongrass”. Then you are going to do all your costing and when you get all done, make sure you save it again as “Lemongrass”, you’re going to save it under the same name as you renamed it, but after you’ve done all the calculations. Now, I’m going to cover right here what was wrong with the original spreadsheet. The original spreadsheet was set up with a standard weight of 4 oz. bars. When you make your soap, every mix is going to be different because you are using different percentages of different ingredients. So one bar is going to weigh 4-1/4 oz. and the next bar is going to weigh 3.75 oz. they are going to vary. What doesn’t vary is, and most people are using Derek’s cutters, you get a cut of 11 bars. So, you should take and change where it says total bars, you should change that to 11. So it’s calculating on the basis of 11 bars, if you are making one batch. If you are making multiple batches at one time, then you want to change it to however many molds, you’re going to have 3 molds, then you’re making 33 bars. If you’re making 4 molds at once, you’re making 44 bars. The original spreadsheet had a formula there, so it calculated out based on the total weight at 4 oz. a bar. The whole theory there was you’re not using a standard cutter, but most people now seem to be using the standard cutter where that’s going to make 11 bars standard size. That’s probably a good idea because it’s going to fits in a package like this and you’re not going to have to worry about it. The other thing is this is all set up so you can change the package cost and the package size. You leave the formulas on the right hand side alone. Those formulas shouldn’t be changed. The left half though, prices change all the time. If the price goes up, if you get a special deal, you’re going to change the package cost so it flows through and the correct package cost is reflected through the spreadsheet. Also, on the original spreadsheet, these columns a couple of these didn’t get extended out correctly. I think the coconut oil is 25 lb. pail, so that extends out to 400 oz., not 448. These on this column and this column, you can change those amounts and they will flow through the spreadsheet. You shouldn’t be changing the stuff over here because those are all formulas. Elsa: Is this a different one then the one you sent? Paul: No, this is a spreadsheet of what Julie used, so I’m just using hers as an example. Elsa: A good example, I hope? Paul: A good example, because she did the calculation and you should be doing this type of calculation whenever you’re thing about doing a new soap. It’s one thing if you’re doing a test just to see if it is really what something what I want to do. Listen, you can make it and it stinks, it’s lousy, you hate it. All right, throw it out, don’t bother with this. But you do it and you just love the soap and you want to start making it, before you start making production, you should do this to see if it’s realistic. You know, it costs out to $8 in costs, it’s doubtful you’re going to be able to sell it. Most of you are going to be changing the cost and the package size as you’re doing it, because remember your prices are going to change, you might get a deal, you may get a discount, you may buy a different size package, so some of that stuff is going to change. Susan, I will give you a new spreadsheet and why don’t you just send it out to everybody a new revised calculator. So next week, look for it, Susan will send you out an e-mail with the attachment and it will say “Revised Calculator.” Now, one of the things the Filthy Nurse is going to do in one of her niches she came up with, being a nurse, is new mothers for some unfathomable reason, I would never have dreamed this, but some of the new mothers want to have soap made with their breast milk. Julie Well you know what, goats milk is as close to human breast milk as can be, so people that love goat’s milk. If there is a market for it, and if somebody wants me to make it, I’m not afraid of breast milk, I have been elbow deep in it for 10 years. Bring it on. Some of these ladies have tons of extra because when they are not breast feeding anymore and they have freezers full. Paul One thing that you have to remember and this is a perfect example of state and federal laws, you only can sell that to the original person. If somebody provides the breast milk, she cannot sell that to someone else. She can’t call Paul up and say “Hey Paul, I just made this great batch of breast milk soap, do you want some?” No, the federal government, not that I would even say yes, but the federal government would say, “No, that is bodily fluids, you cannot sell that to someone else.” So this is a perfect example of where you have to look at federal and state laws on what you can do as far as providing this. Julie went through and she did another cost calculator’s spreadsheet for the breast milk soap, because she wanted to know, okay what is this going to cost and this is a good example of how the numbers flow through and you’ve got different, because now the breast milk takes the place of some of the other products, you know no more distilled water because its got the breast milk and so on. So, it ended up with a lot different numbers because for the most part there not looking to have fragrances in it, they want to have the basic. If they want a fragrance, she provides it, but then it’s an extra charge. And the other thing is they have to buy the whole batch because there is nothing she can do with the product if they don’t, all I want is three bars. What the hell am I going to do with the other 8 bars? So, by costing it out then, she knows what she can market it for, what she can tell the people, “Okay, give me your breast milk, I can make one pound batch of soap for you, this is what I’m going to charge you.” If she didn’t do the spreadsheet, she’s guessing at what it is. She is taking a wild stab at what she can charge and make money. Obviously, she is doing this to make money, so now one thing she doesn’t have in here is packaging costs and I don’t know, so in this case she only has a small batch, its only got five bars, but she knows what the cost per bar is two bucks, so the batch is $10 and part of the reason for that is she has no a fragrance in it. The breast milk takes the place and it’s given to her so she has no cost there, so of course the cost is going to be lower. The point is, she did the spreadsheet to know where she was going to go with it, what she could charge, whether it was reasonable. She could have done the spreadsheet and it could have come out to a batch cost of $22. Well, there is a limited number of new mothers laying in the neonatal unit that when you say to them, “Well I got to charge you $40 for five bars of soap”, then they’re probably going to do it. A lot of them are going to say, “Eight dollars a bar, I don’t think so.” But, I don’t know what are you charging for the batch? Julie: Well I haven’t gotten there yet. I’ve made a lot of it for friends and playing around with it, but I haven’t officially started selling soap. Actually pulling up the spreadsheet for you the other day really got me thinking about how I would do it because initially I thought what heck I’m selling all the bars because I ought to make a pretty good profit on it because they have to buy them all instead of buying one at a time. But then time wise in making one batch and then they’re taking only five bars, well I would make more money if they took a two pound batch. It’s the same amount of time in making one pound as a three pound. So I’m still playing with it. Paul: Anybody have any questions about how she’s doing this or the spreadsheet? This is the final slide is it really comes back to focusing. It’s the kiss principle, keep it simple and steady. I didn’t want to say that. Keep it simple and steady. Focus on what you’re doing, where you want to go, how you want to get there and you’re going to be successful. So, it all comes back to the focus of the focue you put on your business and on your products. Any questions. Elsa Yes, my question is if it costs me $3,000 this year to get started and I make no money, am I looking to dump that over the next three years? Because you know the start cost Paul: Why would you want to take it three years? Elsa: But what if I don’t make any money this year? Paul: The deductibility of it comes back to the profit motive. Are you trying to make money, yes. You’re just getting started, it’s a new business. If the IRS were to look at your situation and chances are they never would because it’s for them if you don’t lose $100,000,000, they are not all that worried, so hopefully you won’t lose $100,000,000. If they happen to look and talk to you they would want to know, “Okay, what are you doing, how are you doing it, are you trying to make money, what are you doing trying to make money.” That is why I tell everybody they should do a business plan because that is part of the documentation that you are going to produce; this is what I’m doing, this is how I’m approaching it, this is how I’m trying to make money. It is not just the seat of the pants business. I don’t have a shopping bag here and I throw all of my receipts in it and at the end of the year I give it to my accountant and he tells me whether I made money or not. That’s not the way to run a business because you’re just not going to be able to put it all together. You should be able to a monthly P&L statement and know how you’re doing, what were my sales, what were my costs. Elsa: Right, but it costs money to get started Paul: But it comes back to what you document as far as are you trying to make money, and they want to know if you are trying to make money, yes. Okay, they don’t take your word for things, they want you to show them what you’re doing to try to make a profit, okay. I will go back to the race horse business, when they looked at the race horse business, there was no way in the world these things were going to make money. It was a rich guy that liked race horses and he put them out there. The only way he was ever going to make money is if he won the Kentucky Derby and the Preakness and the Belmont and he got the millions from that and he could syndicate the horse, but that was the only way he was ever going to make it. Well there is only one horse a year that could even has the chance of winning all three and it don’t happen very often. The last one was 1978, so it just doesn’t happen very often, so that’s where they came up with a lot of these rules about hobbies. Michelle: I started making soap a long time ago, but I just started wanting to make a business. Obviously I already have molds, I already had ingredients, I already have colors, I already have a lot of stuff. I bought some more. How do I put my stuff I already have, how would I estimate it? Paul; Well you make a list of all the stuff that you have, put a value on it and basically sell it to your corporation and then the corporation takes it from there. Now you can’t do that if you actually reported and took a deduction for those items. You never did anything, you never had a business before, and you just did it as a hobby. So it was never deducted, you just bought it all, so at this point you have to look at it and say I have so much of olive oil, so much of this fragrance and that fragrance and you just make a list of everything and put a fair market value on it and basically you sell it to the business. Man with group I’m an ex IRS agent. Paul We have a spy in our midst. Man with group But what Paul said about going into business hobby versus business, while we never took your word, we wanted your documentation, still the logic that you presented in terms of whether it’s a business or not, coupled with that documentation is a long ways. Paul: That’s the psychological mind set. Man with Group: Exactly, if you follow a reasonable business pattern, you have done this and done that and you have documentation that I have gone here, gone there, like this seminar, and that sort of thing, those are all things that we’d want to prove….. Paul: The IRS has manuals for what each program that they’re working on and there’s a manual for looking at a hobby business type of situation and they look at these issues. You know, is there a business plan, is there does it make sense. Go back to the idea of the cost, it does, it would not make sense to an agent if you had a cost of $10 a bar and you had it out in the store for $20, it would not make sense to that agent that you were trying to make a business out of this. Because you’re not going to sell many $20 bars of soap. Man with group Just as it wouldn’t make sense if you spent $10 for that bar of soap and you were selling it to me for, your buddy for $3.00 a bar. Paul: Right, same idea Lady in the back Going back to be incorporated. Say you have an “S” Corp. Under the “S” Corp. you can have DBA’s. Now the owners of the “S” Corp are protected by that corporation in case I’m the one that’s sued. Now I have an “S” Corp, I have two other businesses, how protected am I with a DBA? The reason for the DBA is because I don’t want to have too many corporations because the accountant is going to charge me for each corporation. I can have one DBA under one tax ID number, one sales tax number. Paul: Number one, think of, yeah you’re going to pay something for each of those corporations. It’s cheap insurance. If you get sued, it’s not going to be for $1,000, if you get sued it’s going to be for $100,000, $500,000, $1,000,000, big numbers, it’s not going to be for $2,500. I mean most “S” Corporations if you do your own bookkeeping and you give the books to an accountant, he is not going to charge you much more than $2,000-$3,000 to go over everything, even if you have two or three different businesses. Lady in the back Everything is under an “S” Corp, so under my “S” Corp there are three or four DBA’s, the three or four DBA’s are part of this “S” Corp, but my concern, my main question is: Is a DBA protected because it’s part of an “S” corporation? Paul: Number one, I’m not an attorney, I’m a CPA. I’m not giving legal advice here, I’m giving you business advice, so don’t think of this as legal advice on your protection. An idea a corporation protects you from liability is a general business premise. Most business people know that, so now, one of the things when somebody is doing business with you, they have to know that they are doing business with a separate entity. They have to know they are doing business with a corporation. If they’re doing business with me and everything they do is with Paul and they write the checks to Paul, they are doing business with Paul as an individual, as far as they’re concerned. Now, somehow they get injured, whatever happens and they want to sue me. If they’ve always written the checks to Paul, if always dealt with Paul, everything they’ve look at my business card and everything else is Paul, it doesn’t say anything about a corporation, it is going to be difficult for me at that point to say, “Oh wait a minute, you forgot I’m a corporation.” No, they’re doing business with Paul personally. So you’ve got to make sure that your soap or whatever it is even if it has a fictitious name, “The Soap Goddess” on it that it identifies you as a corporation. If it identifies you as a corporation, you should be protected, but you have to have that. The name has to say, Inc., LLC or Incorporated or Corp., it has got to have something on there that identifies it as being a different entity type, other than a sole proprietorship.