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“Is it a business or a hobby?” That’s the question I ask contractors at workshops where I’m a speaker and in the webinars and teleseminars I run. I even ask my one-on-one clients this question when we begin our work together.
As you can imagine, this question can ruffle some feathers.
There are multiple reasons why I ask.
One reason is I want to know if the trade or trades the company currently does are being done by more than one person. Because if only one person can do the work, these contractors need to stop kidding themselves about running a business when they’re really supporting a hobby!
If this sounds like you, ask yourself what would you do if the one person who can do the work gets hurt, quits or, worse yet, dies?
To me, it’s only a business when multiple people can do the same set of tasks in a similar manner and get the same consistent positive results.
The second reason I ask is, even if multiple people can do the work, it’s only a business when you can make money at it. So, if you continue to lose money over a period of time doing certain types of work, it’s a hobby your company is supporting.
The last reason is, if you’ve been in business for three years or more and haven’t turned a profit, you must face facts — the way you’re running your business is more like having a hobby and an expensive one at that. You can stay in business a long time losing money if you keep pouring in your own money and/or money you’ve borrowed.
Don’t believe you can survive a long time on borrowed money? Look at the deficits we’re running as a country year-after-year. We can get away with it because for now others are willing to lend us money.
And know our “friends” at the IRS would tell you that if your company fails to turn a profit year after year, you’re supporting a hobby.
Please seek your own accounting counsel, but here’s a very short excerpt from www.irs.gov on how the IRS defines a business carried on for profit:
“In order to make this determination, taxpayers should consider the following factors:
- Does the time and effort put into the activity indicate an intention to make a profit?
- Does the taxpayer depend on income from the activity?
- If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
- Has the taxpayer changed methods of operation to improve profitability?
- Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
- Has the taxpayer made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
“The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year … .”
From hobby to business
It’s easy to be delusional. Contractors can delude themselves by staying afloat by borrowing money or putting in their own money year after year, doing the same thing with the same results. But it’s only throwing good money after bad until you commit to what it takes to turn your hobby into a business.
These seven steps will help you move from having a hobby to running a profitable business:
- Know what to charge for each task you do so you make a profit.
- Track your callbacks so you can see if you’re trying to “Fill the profit bathtub with the drain wide open.”
- Make sure you document, in writing, how each task is done so it’s objective and repeatable.
- Make sure you cross-train your staff to handle multiple tasks and even multiple trades.
- Market yourself based on the added value you bring vs. strictly the low price you can charge.
- Get testimonials from satisfied customers to validate how good your company is so it’s easier to sell to prospective customers.
- Know your financials so you can either get more of the calls you seek, get better at the calls you run or dump the tasks, trades and customers that never make you money.
Are you ready for more ways to move from having a hobby and running a real business? Here are just three more steps to reach the next level:
- Create an organizational chart that has the boxes (not the titles) it takes to run your company and show your staff a career path is available at your business vs. just a dead-end job.
- Write up the activities each position on the organizational chart is responsible for and make it measurable as to whether employees are doing what you desire.
- Get staff members to prove to you they can do whatever task is in their box on the organizational chart by doing a side-by-side with them and having them either do a “Tell Me” or a “Show Me.”
- A “Tell Me” is getting the employee to say something to you that convinces you he knows how to handle a task. For example: “Give me the first three steps you’d follow as a CSR when answering the phone.” Then listen and see if his answer convinces you that he knows.
- A “Show Me” is getting an employee to do something in front of you that convinces you he knows how to handle a task. For example, have the accounts receivable person input an invoice into your computer or have the accounts payable person pay a vendor.
Do this well enough and you will graduate from supporting your hobby to owning and loving your profitable business!