PART 1: GETTING THE BEST RETURN ON INVESTMENT:
Finding That Sweet Spot Between Risk and Reward

Balancing Risk and Reward

Abstract:

It is very feasible to start and run a successful business selling hand made products. This series of articles introduces you to the things you will need along the way as you develop your business financial management road-map. Financial management includes all the things you need to do in order to maximize your Return On Investment (ROI). This system relates risks to rewards. It mostly involves a system of data collection, monitoring and analysis methods employed by any successful business. Activities in this kind of system include things such as general accounting and bookkeeping, inventory management, and record keeping. These include things you do to establish and maintain formal relationships with employees, independent contractors and suppliers. These include things you do to secure your money, such as with banks, financial institutions, insurance companies and even such things as crowd-funding online. This is a lot of numbers and analysis, and often, when we look at why people fail in business, it is often because of a generalized fear of getting control over all this. Successful business people and successful businesses need to foster a culture which promotes a growth mindset. Simply this is a culture where you have permission and encouragement and confidence to take risks and earn those rewards.

A Focus On Your Return On Investment (ROI)

You put a lot of time, effort and resources into designing your products or processes and building up your business. This all has a cost to you in time, money, and even relationships. You want a Return On Investment (ROI). You want to see some benefits that exceed your costs. Joy, happiness, contentment, money, security, less stress, more opportunities and more challenging opportunities to be creative, more fulfilling relationships.

When you take your creative endeavors and turn them into a business, the core focus primarily rests on increasing your returns on investments (ROI’s) through smartly and strategically managing your finances. You want to set into place various management structures and routine data collection procedures to assist you in managing risk and maximizing rewards. You want to minimize the effects of uncertainty on your business.

Sometimes, creative people think that some people are born to take risks, manage them and live with them, and others are not. This is not true. Having a business sense is not something innate or genetic. It’s something that is learned over time, often with a lot of trial and error, many failures, but key successes, as well. There is no reason, if this is something you want to do, to shy away from thinking about or attempting to monetize your designing as a business.

Towards this end, you want to get a good handle on such things as:

PART 1:

a) Understanding risk and reward

PART 2:

b) Tracking your costs and revenues

PART 3:

c) Tracking your inventory

PART 4:

d) Other record keeping

e) Employees and Independent Contractors

f) Banking, Insurance and Credit Card Processing

PART 5:

g) Getting Terms

h) Getting Paid

i) Crowd-funding

PART 6:

j) Fostering a Growth Mind-set

a) ROI: Understanding Risk and Reward

It is important to understand risk and reward, and how to manage these. Part of managing these is putting into place systems which collect necessary data — primarily about costs and revenues — and evaluating the data and its desired impact on everything you are trying to achieve in your business. Anyone can do this. But designers who foster a growth mind-set are often better at managing risk and reward.

What Is Risk and What Is Reward

Risks and rewards are gambles. They are probabilities. Chances. They help define the likelihood for determining whether what happens next will hurt you or help you.

Risk is the likelihood that you will lose either or both tangible rewards (money) and intangible rewards (success, happiness).

Rewards are the profits, again tangible (money) or intangible (success, happiness), you receive from taking risks.

Usually, the greater the risks you take, the greater the rewards earned. But this is not a guarantee. Losses can occur, usually resulting from the failures to properly manage the relationship between risks and rewards.

Risk management is important in every business because without it, that business cannot clarify what goals it needs to set, and what steps it needs to take towards meeting those goals. There are more things to do on a day-to-day basis than you could possibly do and get done. Risk management helps you narrow down the tasks to those most likely to have the greatest rewards.

Risks (and rewards) are different for each person and business. Ambitions vary. Time budgets and time frames vary. What makes people feel happy and successful vary. But we can begin to delineate some risks and rewards most designers might face as they pursue their businesses.

Risks and Rewards must be managed in a deliberate, rational, and day-by-day way. Routinely. With fore-thought and organization. This means collecting data. This means analyzing data. This means closely looking at risk and evaluating whether it makes sense, or not, to continue doing what you are doing, or what you want to be doing. Is it sufficiently rewarding or profitable? What is the opportunity cost? That is, you could be expending the same amount of resources (time, motivation, money) doing something else that might have a greater return.

Any business is fraught with risk. If it were easy to start a business, everyone would do it. But it is not. Again, it requires routinely collecting and evaluating data. It takes you out of that creative mode and way of thinking, and plops you down into a very different administrative one. In order to sell a piece of jewelry or an interior design plan or a website configuration or other design projects, you have to begin to deal with things like marketing and promotion, production, distribution, inventory management, investments in tools, parts, displays and equipment. You need to closely track all your costs and all your revenues. It means taking chances you might lose money or fail. This can be scary.

When managing risks, it is important to remember:

1) Don’t confuse Risk with Fear. Fear keeps you from doing things. Risk aids you in asserting some control over uncertainty.

2) Simply be aware that both Risks and Rewards exist. Where there are greater rewards, there are usually also greater risks.

3) Yes, risks are risky, but should not be reckless.

4) Make decisions based on the relationship of risks to rewards. It is not the number of designed products or projects you make. Rather it is the average return you get from each design, given the costs and investments you made in order to finish it and sell it. This type of information will clue you into such things as what might happen if you too aggressively seek rewards, or too timidly accept risks.

5) Don’t put all your eggs in one basket. Diversify the types of designs you make, designs you do, parts you use, markets you seek to exploit.

How Do You Measure Risk and Reward

As a designer, you will be measuring risks and rewards in a few different ways.

1) Measuring Risk and Reward: General accounting

2) Measuring Risk and Reward: Financial Management

3) Measuring Risk and Reward: Inventory Management

4) Measuring Risk and Reward: Pricing

5) Measuring Risk and Reward: Impression Management

1) Measuring Risk and Reward: General Accounting

You will set up a General Ledger (G/L) to track your revenues and expenses, and liabilities and assets. This is like setting up a giant table or spreadsheet. You enter every piece of information into this table or spreadsheet that represents some kind of expenditure you make or some kind of revenue received. In Part 2, I go into more detail about setting up a General Ledger.

2) Measuring Risk and Reward: Financial Management

Here you try to reduce things you do to a series of rates and trend-lines. It is NOT the number or dollar amounts of your sales. Instead, it is your rate of sales. Your rates of inventory reduction and replenishment. Your accumulated debt to earnings. Breakeven analysis. Trends in gross profit and net profit.

For some rates, management means maintaining a constant velocity or turn in the rate. For example, if you as a jewelry designer need to sell a minimum of 6 pieces of jewelry each week to breakeven, are you able to maintain at least this rate every week in the year? If not, for those times in the year where the velocity of this rate might slow down, what else can you do instead to maintain your business at least at the breakeven point?

For other rates, management means maintaining an upward trend or trajectory, even though some weeks the data may decline. Especially when you first get started in business, your gross profit and net profit might be low or even negative numbers. The trend line is more important than the specific monthly numbers.

Leverage. A related concept in financial management is leverage. This is the degree you leverage someone else’s money to make money for yourself. You might be paying for some of your inventory, equipment, furnishings or other business expenses using a credit card or relying on a bank loan. You might be listing your jewelry on someone else’s website or marketplace. You might be co-marketing your jewelry with someone else who sells a product which can be integrated with yours. You might be buying inventory on terms, say NET 30, where you do not have to pay for the inventory for 30 days. You might maintain bare minimums of inventory items, where you depend on your suppliers to provide just-in-time shipments, thus having your suppliers foot the bill for a lot of storage costs.

In each case, someone else has made investments in things that you do not have to. Sometimes, you pay for some of these over time. Othertimes, the synergistic effects create payments for all parties above and beyond what each could do on their own. All of this is called leverage.

We have to monitor leverage, as well, to be sure the rewards we get do not exceed the risk we undertake to get those rewards.

3) Measuring Risk and Reward: Inventory Management

There are three important things to understand about inventory up front:

1) Inventory is a placeholder for money. You paid for your inventory, and you get that money back when you sell it.

2) As a maker and designer, you will have a bi-furcated inventory, a) an inventory of finished pieces ready for sale, and b) an inventory of parts and pieces beginning to be made into things, but not yet ready for sale.

3) An inventory of digitized files and applications.

Holding inventory ties up a lot of money. This money is in the form of parts, perhaps restricting and constricting you in what colors, styles, materials, components and the like you will be able to use when designing a piece of jewelry. Too much or too little of inventory — and the right inventory for the moment — can break your business.

This all means that inventory is something that needs to be monitored and managed. Your goal is to minimize the cost of holding inventory. This involves figuring out ways to know when it is time to replenish inventory, change out and update inventory, or buy more materials to manufacture inventory. After all, you want to prevent these kinds of things from happening…

· Lose sales

· Hurt cash flow

· Buy too many things which don’t and won’t sell

· Create storage problems, including prevention of deterioration, such as plated finishes which fade over time

· Needing cash, but it’s all tied up in inventory — you can’t eat beads

· Reduce your profitability

· Reduce your resiliency — that is, an ability to adapt to fashion, style, demand and culture changes

· Losing that balance between efforts directed at inventory management with efforts required for general administration, marketing and promotion

In Part 3, I go into more detail about managing inventory.

4) Measuring Risk and Reward: Pricing

The price you set for each piece of jewelry has to be based on all the costs you incur. Not just the costs of the parts. Not just the time you put in. All the costs. These include, parts, labor and what is called overhead. Overhead is everything else: electricity, heat, rent, business travel, wear and tear on tools and equipment, and the like. It is not cost-effective to have to track each and every one of these overhead costs separately, so we typically estimate them using a formula. From a management standpoint, this formula needs to make sense and come close to its approximation. It has to be defensible.

Read my article: A Fool Proof Formula For Pricing And Selling Your Jewelry

Or, view my video tutorial: Pricing and Selling Your Jewelry

5) Measuring Risk and Reward: Impression Management

Much of what we do these days is digital. We promote and sell our pieces on line. This might be directly through a website. It might be through social media. It might be through an auction site.

In the digital world we track and manage impressions. Measures of risk in the digital world include concepts like Costs Per Click (CPC), Costs Per Impression (typically per 1,000 impressions)(CPI), Adds To Cart (ATC), Cost Per Add To Cart (CATC), conversion rate (relates visitors to visitors who actually buy something), costs to maintain current conversion rate, and so forth.

Given the velocity or trends in these rates, and the returns on investments for you (such as costs of maintaining a website, marketing and promotion, supporting an inventory, handling money and credit cards, costs of shipping), you ask yourself questions about your various business and marketing strategies, your user experiences, and user impressions. What is it costing you to persuade people to buy?

Some of these analytics will be provided to you in stats packages you can integrate with your site. Others will involve collecting data yourself, and analyzing them, usually in spreadsheets you create.

Next, you need to translate your understanding of risks and rewards into systems of data collection and analysis, beginning with the basics of tracking the flow of money in terms of costs and revenues.

Continue with this series,

Financial management includes all the things you need to do in order to maximize your Return On Investment (ROI). It mostly involves a system of data collection, monitoring and analysis methods employed by any successful business. This system relates risks to rewards. Activities in this kind of system include things such as general accounting and bookkeeping, inventory management, and record keeping. These include things you do to establish and maintain formal relationships with employees, independent contractors and suppliers. These include things you do to secure your money, such as with banks, financial institutions, and even such things as crowd-funding online. This is a lot of numbers and activities, and often, when we look at why people fail in business, it is often because of a generalized fear of getting control over all this. Successful business people and successful businesses need to foster a culture which promotes a growth mindset. Simply this is a culture where you have permission and encouragement and confidence to take risks.

GETTING THE BEST RETURN ON INVESTMENT (ROI)

PART 1: Finding That Sweet Spot Between Risk and Reward

PART 2: How You Are Going To Control The Flow Of Money

PART 3: Maintaining, Tracking and Controlling Your Inventory

PART 4: Record Keeping and Other Considerations

PART 5: Getting Terms, Getting Paid, Getting Crowd Funding

PART 6: Maintaining A Growth Mind-Set

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FOOTNOTES

Campbell, Casandra. What Is Inventory Management? How To Track Stock For Your Ecommerce Business, Inventory Management, 6/19/20.
As referenced in:
Inventory Management

Caramela, Sammi, 10 Essential Tips For Effective Inventory Management, Business News Daily, 4/15/2020.
As referenced in:
https://www.businessnewsdaily.com/10613-effective-inventory-management.html

Dweck, Carol. Mindset: The New Psychology of Success, 2006

Fundbox.com. Trade Credit: Everything you need to know about net terms for your business. n.d.
As referenced in:
https://fundbox.com/resources/guides/trade-credit/

Shah, Vyom. Crowdfunding the Jewelry business, 11/27/14.
As reference in:
https://betterdiamondinitiative.org/crowdfunding-the-jewelry-business/

_____________________________

Other Articles of Interest by Warren Feld:

Naming Your Business

The Importance of Self-Promotion: Don’t Be Shy

Are You Prepared For When The Reporter Comes A-Calling?

A Fool-Proof Formula For Pricing And Selling Your Jewelry

Designer Connect Profile: Tony Perrin, Jewelry Designer

My Aunt Gert: Illustrating Some Lessons In Business Smarts

Copyrighting Your Pieces: Let’s Not Confuse The Moral With The Legal Issues

Naming Your Business / Naming Your Jewelry

Jewelry Making Materials: Knowing What To Do

To What Extent Should Business Concerns Influence Artistic and Jewelry Design Choices

Getting Started In Business: What You Do First To Make It Official

So You Want To Do Craft Shows: Lesson 4: Set Realistic Goals

The Competition: Underestimate Them At Your Peril!

When Relying On Other People To Sell Your Jewelry

Component Design System: Building Efficiency As Well As Effectiveness Into Your Jewelry Designs

The 5 Reasons Jewelry Designers Fail At Business

__________________________________

I hope you found this article useful.

Also, check out my website (www.warrenfeldjewelry.com).

Enroll in my jewelry design and business of craft video tutorials online.

Add your name to my email list.

Visit Land of Odds online (https://www.landofodds.com)for all your jewelry making supplies.

Subscribe to my Learn To Bead blog (https://blog.landofodds.com).

__________________________________

SO YOU WANT TO BE A JEWELRY DESIGNER
Merging Your Voice With Form

588pp, many images and diagrams Ebook or Print

PEARL KNOTTING…Warren’s Way
Easy. Simple. No tools. Anyone Can Do!

184pp, many images and diagrams Ebook or Print

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Beading and jewelry making have been wonderful adventures, from custom work, production work, and teaching. *Design is about the ability to make smart choices.

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Warren Feld

Warren Feld

Beading and jewelry making have been wonderful adventures, from custom work, production work, and teaching. *Design is about the ability to make smart choices.

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