Staying organized and operating like a real business
A successful retail arbitrage business operates just as a successful traditional business does. You have your revenue source, your expenses, your taxes, etc. And at the end of the day, you want to be profitable just as a traditional business wants to be.
Going even further, you want to be able to see the following:
- Risk management – be able to make purchases with a low chance of being unprofitable
- Repetition – recognize and be able to make the right moves over and over again
- Data to analyze – see what works and what doesn’t at a glance to spot mistakes and pitfalls
This chapter will go over how to do that with retail arbitrage. Follow the instructions in this chapter and doing retail arbitrage can be far more than a side hobby – it can be a business that makes you even more money than your day job does. This is no exaggeration.
Getting set up: setting aside RA funds
One of the biggest hurdles to overcome with retail arbitrage is getting the necessary funds to play with. As a beginner, you should assume that you will make a few bad buys along the line – even with this extremely helpful guide you’re reading, mistakes do happen.
The best way to safely build up an investment is by setting aside funds from your other income sources. Unless you have a fund for entrepreneurship already built up, using your “essential” money can cause you to act on emotion – avoiding expensive items, getting caught up in profit without analyzing all of the key factors, etc.
There’s no room for emotion in retail arbitrage – it’s a numbers game. We always recommend starting with $300 to $500. This is enough to buy multiple units of $10 to $30 products (as we recommended in the last chapter) without the purchase eating up all of the money in your wallet.
“I’m just curious… saving $300 to $500 seems like a whole thing.”
Considering we’re writing this guide, we’re obviously very interested in retail arbitrage. But we recognize that you might not be quite as sold on the idea yet.
If you’d like to just get your feet wet, you can go with a personal seller account on Amazon (less profit per sale, but no monthly fees) and just $80 to $100. You’ll be buying one unit of each item that you find, and if you do well, you can always save more and start buying multiple units.
Here are some ways to get these funds that you have no qualms about risking:
- Eat out less: start cooking dinner and making lunch at home; this will save you a surprising amount of money per week
- Divert your paycheck: set up a funnel on your online banking to dock $20 to $50 from your paycheck and push it into a dedicated RA bank account
- Sell some stuff: you have an Amazon account, right? Sell some old books, electronics, etc. You don’t even have to label them in most cases – you just send them right to Amazon’ commingled inventory system
Tracking time, purchases, revenue, and profit over time
Once your investment is in place, you don’t want to mindlessly blow it right away. If all goes well (as it should, considering this guide tells you exactly what to do), you have just started a small business. Like we said before, in order to succeed, this new small business must do the same things as a successful traditional small business would.
Creating a timesheet
Time is money… literally. All business owners are trading a certain amount of their time for a certain amount of money.
Businesses grow when the owner (such as yourself) can determine which tasks are taking him the longest, and then delegate those tasks so that he can focus on the bigger picture.
From the second you start, you’re going to be tracking the time you spend on each individual task for FBA. The sourcing of products will take up most of your time, but the time spent other tasks – packaging items, listing products, etc. – is not negligible. Use a free timesheet tracker such as My Hours.
Make sure that you create a new time block when you switch to a different task. And track everything, even the time it takes you to set up your Amazon account in the first place and the time you spend talking to seller support. That attention to detail will come in handy later in this chapter.
Setting up your “master spreadsheet”
Getting started means that you’ll have only a few products in limbo at once. You don’t need anything terrible complicated – Microsoft Excel, OpenOffice Calc, or even a Google Doc spreadsheet will be plenty.
You should have a column for everything below:
- Item name
- Sourced from
- Total units purchased
- Source price per unit
- Source shipping cost per unit
- Packing material cost (for example, if you buy an individual box at the UPS store to ship the items you sourced)
- Ship to FBA cost (the price of the UPS label that you print from your seller dashboard)
- Total cost to get units FBA
- Revenue per unit
- Amazon FBA fee per unit
- Amazon referral fee per unit
- Total FBA fees per unit
- Profit per unit
- Total profit potential
- Total units sold
- Current balance (Total profit – total cost to get units to FBA)
When you get a new order, just fill out the fields and you’ll have everything calculated for you.
If you have no idea how to use a spreadsheet program, you can always buy a premade FBA spreadsheet. There’s one available on Etsy for $20.
Taking into account opportunity cost and taxes
Are you sacrificing anything to be able to do RA?
Let’s say that you’re a freelance web designer, and by delving into retail arbitrage, you are doing two hours less of web design work per day. Your opportunity cost is whatever those two hours would have made you if you had dedicated them to web design.
It’s unrealistic to think that you’ll start making as much as your day job right away with RA – this is just something for you to consider.
Diverting FBA profits appropriately
In RA, you will source products that don’t end up selling. The last thing you want to do is be reckless with your profits. If your inventory gets tied up, you’ll be stuck.
Repay the total cost to get to FBA first
Timing is everything in retail arbitrage. If you’re on track to sell out within a week, there is a chance that someone else barges in and takes your listing out of the equation with his superior prices.
Even if your product looks like a winner at the start, the end might not end as well as the start began. Reinvesting funds without recouping your initial investment in full is slightly reckless.
We highly recommend putting all of your revenue (including your profit) back into trying to repay the total cost to FBA immediately. This reduces risk in the long run, which is crucial in a fluctuating business like RA.
If you followed our advice and are using funds that you don’t need for basic living, this is entirely possible to do every time an item of yours starts selling. As long as you don’t deviate, you’re reducing risk right off the bat.
Taxes, taxes, taxes
Any profit that you make from retail arbitrage is taxed. If this is your first entrepreneurial pursuit, you have to learn about the difference between being employed and being self-employed.
Yes, you have to pay – Amazon will ask for your social or EIN when you sign up, and at the end of the year, they report your income to the IRS. If you don’t file, the IRS will still know about your revenue.
Your tax bracket is the same – all income tax is lumped together on the federal level, so the amount you have to set aside is determined by your current income source.
State sales tax varies – the amount you pay to the state from your profits will be dependent on the state you live in.
No refund – nothing is docked from your profits, so you pay exactly what you owe and get no refund at the end of the year.
Often more taxes than being employed – in most states, a one-man operation means that you have to pay as both the employer and the employee.
What does this mean? In some states, your employer automatically deducts certain taxes from your paycheck – for example, social security. You don’t have to pay a lump sum when you file in April because your employer has already taken the amount out as you got paid throughout the year. As a one-man operation, you’ll have to pay your employee social security in a lump sum at the end of the year unless you have the diligence to take it out monthly.
And usually, most companies that will employ you will match your social security payment on each check, too. You are still responsible for those taxes as a one-man show – so you’ll also have to pay your employer social security in a lump sum at the end of the year along with the employee payment.
Then, this is repeated for any taxes that you pay on wages in your state.
We understand that this might be confusing. Taxes inherently are. Which brings us to the next point…
Consider hiring a CPA
Doing the taxes on a business is a lot harder than doing taxes as an employee. Chances are, you’ll waste days trying to figure out what you owe, and any mistakes means that the IRS is on you. Not ideal.
A CPA (certified public accountant) in your state will ask you for your invoices, and past that, you don’t do anything. He files everything for you. Often times, he will be able to save you more money than what he is charging because he has such extensive knowledge of the taxes in your state.
Gee, we hope you’re still with us. Taxes are boring, but necessary. Here’s what you should do after you take care of the government.
Reallocate to grow and see the fruits of your labor at the same time
Spending all of the cash from your profits on material items is no way to grow a business. At the same time, profiting and reinvesting every single cent is, for most people, no way to maintain the motivation of running your business in the first place.
Invest some of your profits back into the business, and some of the profits back into yourself. This ratio can be whatever you want it to be – we just highly recommend sending a little both ways.
The goal: a good hourly
Time is money… did we say that already? At the end of the day, you want to look at your timesheets, compare them to the amount of money that you’re paying yourself, divide, and come out to be making your goal amount per hour.
You’re going to be grinding at the start
When you do this calculation at the start, your hourly rate is going to be abysmal. Especially if you remembered to include all the time you spend on FBA – even reading this guide on it – the number will be discouraging.
Don’t get discouraged. Businesses take time to grow, and if you do everything right, once you get it down, you get excel far past your goal number.
Become better to make more and have more fun
If you continue to keep track of your profits and losses on each individual item, you can see which retailers and product categories are doing well for you. Less research is required per product, and you hit winners more consistently.
As your initial investment grows, you’ll be able to order more of a single product, too. This means that your profit per product goes up, and assuming the retailer doesn’t put a limit on quantity, there is no limit on how many you can buy – Amazon certainly doesn’t have a lack of buyers for most products.
Finally, learning the process will make your work seem like play. You’ll be able to source, package, and list without even thinking about it.
All of this comes together to give you an easy, profitable side business that you can spend as much or as little time on as you want.
Ready to turn it into a full-fledged business? You do that by outsourcing tasks. The next chapter is how to turn a successful solo operation into a hands-off one that can grow exponentially.