Over the course of our marriage, Summer and I have ran several small side businesses between the two of us, including:
- A photography business
- Web / application development
- Childbirth education classes
- Doula (childbirth support) services
We learned a very hard lesson with our very first customer for our photography business. It was a small wedding, and we were just starting out, so the total was about $450 for the job. I deposited their check the day after the wedding, and went to work editing their pictures. I sent them their final pictures about two weeks after the wedding, and went about gearing up for the next wedding. Gearing up there is somewhat literal - we had just some basic camera gear at the time, and were gradually buying more gear. I can't recall what I bought, but it was probably under $400.
A few days later, I received notification from my bank that my photography account balance was negative. It turns out that checks can take up to three weeks (10-15 business days) to bounce, and their check had bounced. Thankfully we had personal funds to cover the purchases we had made. This taught us a couple of important lessons:
- Take a deposit well before the wedding
- If the client still owed a balance at the wedding, hold off on delivery until we could be absolutely certain that the check cleared
- If the client is in another county, take down their drivers license when accepting any checks, as this makes it a whole lot easier to pursue them legally.
Here I am 12 years later, and I am still a little sore from being cheated by our first paying customers. And, 12 years later, Summer has started a new venture - she is now a doula. She just accepted a deposit for her first client. And, here in early 2020, we are now dealing with COVID-19.
So, what if she had become a doula a few years ago, and had booked 3-4 clients per month for March, April and May? Good doulas in this area can charge $1,000 or more for their services. So, we could have been talking about $4,000 per month for these past couple of months. During this timeframe, some of the local hospitals have blocked anyone but an immediate family member from attending the birth with the mother, meaning no doulas.
Maybe a doula client could have some clause it in that would make the services non-refundable at this point. Most contracts make provisions for having a backup doula, especially since birth can be a very unpredictable event - those three clients one has booked for one month might all have their birthing time over the same weekend.
But nobody expected a pandemic. So what if the contract was written in such a way that you had to refund the client if you or your backup could not attend the birth? The closure of the hospitals could have cost us (in this hypothetical scenario) $12,000.
Now add to that scenario - maybe Summer was going to attend a training in a few months to get some additional certifications, and had already spent $3,000 of that $12,000. Not only would she be issuing $12,000 in refunds to her clients, but now we would need to find a way to either cancel her training (assuming we could get the money back), or cover that expense with personal funds.
We have chosen to operate our side businesses without incurring any debt. But to make sure we don't go into debt when bad things happened, we don't pay ourselves until after any possibility of refund has passed.
With COVID-19, how many businesses were caught off guard? Not only could they not serve new customers, but they might have found themselves having to issue refunds for services that were already booked but could not deliver on. To quote someone:
Only when the tide goes out do you discover who’s been swimming naked
Warren Buffett, 2004
Our little side businesses are small. The biggest one has crossed the $10,000 mark in one year only twice. We aren't a $1, $10, or $100 million per year operation. But, by having reserves in our side hustles, COVID-19 was no big deal.