Today, let’s talk about what sort of information you should be keeping track of in your new “books”. The rule of thumb is that when it comes to recording your financial info, you basically can’t record too much. Everything is important, whether for tax purposes or for your own calculations.
The biggest category of info that you will spend your time recording will be your business’ expenses. You might not realize it, but your business probably has lots and lots of expenses. Let’s divide our expenses into two categories, product-related and non-product-related.
- Direct supplies and material costs – these are the items that directly go into your sellable products. For a sewist, that’d be fabric, elastic, or ribbon. These are probably the most obvious expenses, and not too difficult to keep track of.
- Indirect supplies and material costs – these are items that go into making a product, but we can’t necessarily track exactly how much of it goes into each item because it’s either impossible or cost-prohibitive. These are things like glue or thread. I know I used thread to make that purse, but I can’t tell you exactly how many inches or feet went into each one. I know I used glue to make my yarn wreath, but there’s no way for me to be totally sure how many ounces or what-nots of glue went into it.
- Tools, machines, and other items used to create your sellable products – they aren’t literally a part of your product, but you couldn’t make it without them. Examples are your sewing machine, scissors, pliers, or a cutting mat.
- Expenses related to putting your products up for sale and selling them – all those little fees and charges you pay to list your products online or accept payment for a sale, like Etsy listing fees, Etsy’s cut of your sale, Paypal charges, credit card fees, etc.
- Shipping and Packaging costs – including boxes, mailers, labels, envelopes, a postage scale, and decorative packaging items. This also obviously includes the actual price of postage.
- Craft show registration fees
- Startup and legal fees for licenses, permits, etc.
- Display expenses, like jewelry stands, tags, earring cards, racks, tables, pop-up tent, etc.
- Photography expenses, like a light box, new camera, props, editing software
- Promotional material costs (like printing) for business cards, postcards, stationery, custom stamps, labels, etc.
- Advertising expenses
- Design and web development costs for your website, web hosting, logo, banner, etc.
- Research and development expenses for product research, prototyping, business education classes or e-courses, consulting services, books, etc.
- The cost of gas for driving to the post office, craft store, craft fair, business meeting, etc., and lodging for staying overnight for any of these reasons.
I divide your expenses into these two categories mainly for pricing reasons, which we’ll discuss in the future. Let’s just sum it up by saying all your product-related expenses (and possibly even some of your non-product-related expenses) should be considered when it comes time to price your product. A lot of beginning crafters make the mistake of only considering direct materials expenses when pricing their product and then end up grossly under-pricing themselves; look how many expenses they’re forgetting about!
The main point is that your business can have a lot of different expenses. And you need to be recording them all! Thorough expense-tracking serves two main purposes:
- You’ll get a better picture about whether your business is actually making a profit or not, and
- You’ll be able to use most of these expenses as deductions when tax time comes around.
About #1, are you really making money at the end of the day? When you make sales, it might feel like you’re raking in the cash. If you’re only subtracting the cost of your supplies from that revenue, you may feel like you’re really successful, and then wonder why your bank account doesn’t reflect that. If you are truly tracking all of your expenses, you can get a good grasp on whether your business is profitable, how much so, and adjust accordingly. You will also get a better idea of where you’re spending too much money and where you can cut back, and whether your pricing formula needs adjusting or not.
As far as #2 goes, the important thing to remember is that you need to keep proof of all your expenses. Save those receipts, yall! Or star your emails and file them away. Just don’t expect the IRS to be cool with hundreds of dollars of expenses with no support.
Whew! That was a lot of ground to cover. You may be left wondering about the best way to organize all these expense types. That answer all depends on what works best for you. An accounting-based program like Quickbooks or Outright.com will sort your expenses into nifty little accounts for you.
If you use the spreadsheet method (like myself), create a tab for each category or subcategory. For example, I have separate tabs for my main jewelry supply components (crystals, beads, buttons, earwires, etc.), a tab just for shipping costs, one for jewelry tools, and the list goes on. I then have a summary tab where I can use formulas to capture all these different expenses in one place, to see my total spending. The easier your system allows you to capture all your expenses in appropriate categories, the better.
That’s enough left-brain for today. Time to take a break and give yourself a pat on the back for paying attention through this entire post. It wasn’t too painful, was it? Check back next time for more accounting tips for creative businesses!
If you found this post helpful, I recommend you read my post about overhead expenses, which can also help you accurately price your goods for profit, and my post about getting your creative business ready for tax season.
I’d love to hear from you! What do you think is the most challenging part about bookkeeping for your handmade business?
- TurboTax – Which Receipts Should I Keep for Taxes? (turbotax.intuit.com)
- Crafting a Business 101: Creative Accounting (lazyowlboutique.com)
- TurboTax – Tax Tips for Sole Proprietors (turbotax.intuit.com)