Thursday, August 03, 2006

Folding Profits Back into your Business

I do a little disc jockey work on the side. I believe my charges are reasonable, and people tell me they like my tunes.

I started DJ as a hobby, volunteering my services until I gained enough experience to begin charging. When I first started to get paid for my work, I took that first paycheck and handed it over to my wife.

"What's this?" she asked.

"My payment for my DJ gig."

"What are you handing it to me for?" was her next query. She probably figured I wanted her to cash it so I could blow the cash on something trivial.

"Put it in our savings or checking account," I offered.

"Really?" she said, "I thought you would have wanted to spend it on your equipment or something."

Why would I want to do that? Probably because that's what most startup businesses do with those first few paychecks from their new business - put it back into the business. It makes sense. Most new businesses have expenses that need to be paid. If few, there is always more that can be invested back into the business to grow it for even more profit.

Granted the thought crossed my mind to use that first check to upgrade my system a bit. Another CD player would be nice.

Then I got to thinking. Would another CD player make me a better DJ? Would it allow me to charge more for my services? After all, you can only play one song at a time anyway - the two players I have now work just fine in that regard.

But when it came to the ultimate decision on what to do with that first paycheck, two stories came to mind.

Ten thousand songs

There once was a startup DJ, let's call him Fritz. When Fritz began his disc jockey career he had a collection of about 500 songs. Over the years, as he performed, he would invest his earnings to by more CDs to add to his collection. Soon he had over a thousand songs. One day, Fritz happened upon a disc jockey playing at a festival in his town, and he struck up a conversation. At one point, the discussion turned to their collections.

"I have over a thousand titles in my playlist," Fritz boasted.

"A thousand?" began the professional, "that's a pretty good start. We have built our playlist to include over ten thousand titles."

Fritz was crestfallen, but at the same time inspired. He set himself up with a personal goal to acquire ten thousand songs. Every time he received a check for payment, he turned it around and ordered more songs. He hit all the sites: eBay,, etc, as well as hitting the yard sales and flea markets.

After a few years, Fritz was halfway there. He had over 5000 songs under his belt. He could play nearly every request placed on him, and was able to perform gigs that were quite varied in style and substance, given the range of his selections.

But soon after that, Fritz was finding himself losing interest in being a disc jockey. A cousin got him interested in old cars, and now Fritz found himself with a new challenge. He had to have a classic car. But naturally, he lacked the cash for such a purchase. In his mind, his only available option was to sell his disc jockey business. Since he was taking less and less gigs, he realized that "the gig was up," so to speak, and he knew it was time to sell.

He needed $6000 for a down payment on the classic car of his dreams. He figured he paid $4000 for his gear, so that should be worth something, and though he knew he wouldn't get near what he paid for his CDs, he supposed somebody would want such a large collection of over 5000 songs.

The gear sat on eBay and message boards for several weeks and Fritz was starting to get discouraged. Eventually he sold the system for $1800. The 5000 song playlist languished. DJs either were not interested in adding his songs, many of which they already had, or offered him pennies on the dollar. He eventually sold the CD collection for $400 on eBay.

So now, after several years of being a relatively successful DJ, playing well over 200 hours across dozens of gigs, and spending about $8000 for the equipment, songs, and expenses, he now had twenty-two hundred dollars. A fraction of what he needed for the car's down payment. All because he had invested all his earnings back into his business.

Ultimately, Fritz worked a couple hundred hours that netted him a fraction of what he was charging. Had he spent some of his earnings on other than back into his business, Fritz would have had more to show for his work. But he wanted a lot of songs.


The Unlucky Wedding Photographer

There was a photographer, let's call him Graham, who loved taking pictures. He did this as a hobby for years until a friend suggested he turn his hobby into profit. So Graham invested money into his hobby by purchasing enough equipment to shoot weddings.

His first few gigs didn't bring in much money, barely enough to cover the extra equipment and some of his expenses, but as he gained expertise, the profits climbed. As more and more people learned of his talents, his calendar became booked with wedding dates and he was busy as a man can be.

In each and every case, Graham reinvested his earnings back into his business. In only a few years, his equipment went from a single small format camera, a flash, and a few lenses to several medium format cameras, two flashes, a slew of lenses and a motor drive. He had the equipment that beginner photographers drool over.

In the mean time, Graham's business was increasing further. People had to book him eighteen months in advance and he frequently had to turn down gigs to avoid double booking. At one point, he even considered hiring an assistant.

Then one year it happened. Bad luck had befallen Graham, and disaster struck when a huge, high publicity wedding of a very famous couple went sour. The professional photoprocessor that Graham utilized had a fire and all the photos were lost.

There were no professional photos from the couple's wedding.

Heartbroken, there was nothing Graham could do. Though his contract had verbiage that was supposed to protect him, the couple had a high priced lawyer and they sued Graham for the lost memories because he could not deliver as he promised. Graham lost the suit. Big time. Though he was able to keep his house and most of his possessions, he needed to sell most his camera equipment to pay off the lawsuit and his lawyer.

He was able to keep some of the lesser expensive equipment for himself, but the bottom line is that he lost all he had built up over the years. He ended up with basically the same setup he had when he did this for a hobby, but because he invested every dollar back into his business, and lost the business, he had nothing to show for it. Ultimately, Graham worked hundreds of weddings for free.

Had he have put at least a small percent of his earnings towards his monthly mortgage or cable bill over the years, he would have had fared a little better than he did. But Graham wanted his business to be as big as possible.


So does that mean a person new to small business should not reinvest back into the business? Of course not. There is no assumption that you will get pennies on the dollar for your business, or that you will lose it all on a lawsuit.

But care should be taken to ensure that one doesn't reinvest 100% of the profits back into the business even if there is relative certainty that one could get much of it back.

Better to take a smaller percentage of the profits and put it back into the business, but keep a portion aside and spend it on things that also matter - new furniture, clothes, or just paying down your credit card a bit.