Are You Running a Hobby or a Business?

Are You Running a Hobby or a Business?

Hobbies are a source of enjoyment for most people – that’s why they pursue them. Whether it’s making fine furniture, sharing Aunt Sara’s famous apple pie or creating a blog with their writing skills, people are passionate about their hobby. Sometimes after the hobbyist crafts a table for a wedding gift or writes a friend’s resume, he or she may start getting additional ‘orders’ for more.

At this point, the hobbyist may think his or her talent represents a source of income. Unexpected demand leads them to consider selling their product or service. And let’s face it– most people want to spend their workdays doing something centered in their talents and their passions.

But when the idea of generating income is secondary to the passion that drove you to pursue your hobby, you may not have a sustainable business. Can you turn a hobby into a business?  Yes, but you’ll need to think less about your passion (for a while) and step into a business mindset to address key questions about your business structure. Conversely, if you began as a small-business, it’s imperative you don’t let your passion derail your focus on best practices and the bottom line – otherwise you may end up with hobby even if you didn’t start with one.

 

“A hobby without a business structure is just a hobby.”

 

Designing Your Business

Thinking about transitioning your hobby into a business begins by outlining the following areas:

1. What is your value proposition? More specifically, you’ll need to answer
these questions:

  • What benefits do you offer?
  • Why should customers buy from you and not someone else?

An outline explaining how your product or service solves problems or improves customer’s situation will provide a foundation for your business plan.

2. What is your profit formula?

Earning income is essential to turning your hobby into a business. Profit is based on several factors:

  • Your potential sales. How many units do you think you can you sell?
    • Estimating your sales involves determining who you’ll sell to (your
      market), and where you’ll sell your products (your distribution).
  • Your cost of goods sold. How much do you spend buying materials to
    craft your wooden tables? What is the cost of ingredients to make Aunt
    Sara’s apple pie?
  • Your expenses. Beyond the cost of goods, you may have expenses for
    advertising and marketing. You may have expenses for renting a warehouse
    or a storefront. You’ll certainly have to plan for taxes and you’ll have salaries
    for anyone helping you (or simply your own paycheck).

After identifying your costs and expenses for the units you can think you can sell, then determine how much you can ‘mark up’ your products.  If the cost and expenses to make Aunt Sara’s apple pie are $3.00 per pie, can you add another $3.00 and sell your pies for $6.00 each? Your understanding of your customers (and competitors) will help you develop a profit formula.

  • What resources will you need to compete? And how will you adjust your
    activities to meet changing needs in the marketplace? The answers to these
    questions form your business strategy and tactical plan. For your business
    to succeed long-term, your strategy and tactics should focus on specific goals.
    The choices you make along the way about pricing, product range, customers
    and marketing should be focused on making a difference in the marketplace.
    As long as you continue to make a difference, your business will continue to
    grow.

Revenue Targets for Long-Term Success

Realistically, if your business plan shows gross revenues of less than $200,000, you have a journey ahead to reach long-term viability. You may not have the capital and organizational format for your business to be successful or to provide you, as the owner, with adequate income. The incremental cash may be a meaningful addition to your current income but isn’t large enough (yet) to enable you to quit your day job.

When you achieve $750,000 in gross revenue, you have sufficient scale to begin growing your business to reach $1 million or $1.25 million in revenue.

“A [hobby] becomes a business when it can support itself and the owners. It acts, looks, sounds and feels like a business because it has a plan, a strategy, and a way to implement it.”

For more information about developing a business plan focused on long-term success, contact our team of experts at Second Wind Consultants.