How to categorize craft business expenses

How to categorize craft business expenses is really pretty simple.  By the time you finish reading this post you’ll be ready to tackle the task at hand. 

Categorizing craft business expenses can be totally overwhelming and confusing for new handmade, creative or craft business owners.

Heck, even some of us who’ve had a handmade business for a long time can sometimes get stumped on how to categorize something we’ve purchased for our business.

If you’ve done any “Googling” about how to categorize craft business expenses, you’re probably more confused than ever – because the information you found was full of accounting speak or none of the categories you found seemed to “fit” your handmade, creative, or craft business.

I’ve been getting a lot of questions lately from handmade and creative business owners about how to categorize craft business expenses. 

I’ve got you covered, so don’t worry!

Really, it’s pretty simple to categorize your craft business expenses and by the time you finish reading this post, you’ll be ready to tackle the task at hand. 

So, wave goodbye to the struggle and confusion, because I’m going to teach you about:

• Why having a basic understanding of bookkeeping and accounting is helpful
• What are craft business expenses?
• 3 big categories for craft business expenses
• Lots and lots of smaller categories for craft business expenses
• Tips on how to categorize your craft business expenses

Let’s get this done………………

Why having a basic understanding of bookkeeping and accounting is helpful

As a business owner having a basic understanding of bookkeeping and accounting is helpful.

Now don’t freak out, I’m certainly not suggesting that you enroll in a two or four-year college course or even taking a course at your local community college! Those types of courses only teach you about bookkeeping in general. Nothing that’s specific to your handmade, creative, or craft business – and you’d end up being totally frustrated!

As a business owner you’ll find yourself working with numbers in just about everything you do, from stitch counts to actually categorizing your handmade business expenses and putting together reports for year-end taxes!

Bookkeeping, accounting, and all those numbers can be intimidating.  But don’t get hung up over fear of numbers or being afraid of not doing it right – and end up doing nothing at all or waiting until the last minute and throwing something (anything) together. 

Start by learning about the two main financial reports that EVERY business owner should be keeping:

• The Profit & Loss Report (also called an Income Statement)
• A Balance Sheet Report

What are craft business expenses?

Maybe some well meaning person told you that craft business expenses are ANYTHING that your business buys or pays for…………

Business expenses is a very broad term and it’s easy to get sucked into believing that explanation.

It’s true, but, yet it isn’t.

Not every dollar that you spend in your handmade, creative, or craft business is immediately an expense and gets categorized on your Profit & Loss Report.

3 big categories for craft business expenses

As a handmade, creative, or craft business owner, you’ll find that the money you spend belongs in 3 big categories of business expenses.

Those 3 big categories of craft business expenses are:

• Inventory – all the money you spend on materials and supplies that you buy to create the items that you sell.  The cost of all of those materials and supplies are initially categorized as Inventory and is recorded on your Balance Sheet as an Asset or something your business owns that has value.
• Cost of Goods Sold or Cost of Sales – all the costs that are directly associated with the item(s) you just sold and the money you just received. 
• Overhead Expenses – all the money you spend to keep your business running EVEN if you aren’t selling anything yet.

Knowing what these 3 big categories for your craft business expenses is a start. But it isn’t enough because there are……

Lots and lots of smaller categories for craft business expenses

You’ll find that there are lots and lots of smaller categories that fit into or belong grouped under those 3 big categories of craft business expenses.

Sure, some of those smaller categories – like Tax Preparation fees or Website Expenses –   might be the same for all handmade, creative, or craft business owners.

Those smaller categories – especially those that fall into the Cost of Goods Sold and Overhead Expenses groups – will be different depending on whether you are a maker, a pattern designer, a tech editor, etc.

There’s no way that I can give you a run down of all the different smaller categories (and whether they apply to a maker or a pattern designer) in a single blog post.

This is exactly what I cover in my course "What should you be tracking in your handmade business bookkeeping system"

Tips on how to categorize your craft business expenses

It’s pretty simple to categorize your business expenses into those big and little categories, but many handmade, creative, and craft business owners put this off until it’s absolutely necessary – like year end prep for tax time.

And while I’m not judging – when you put this off, you only create more work and stress for yourself.

Here are some tips for categorizing your craft business expenses:

1. Start a Word or Excel (Google Docs or Sheets) list with the 3 big categories of craft business expenses
2. As you dig through your receipts for the money you spent, ask yourself “what was this for and where does this fit into the big expense categories”?
3. Add your smaller expense categories below each of the main categories
4. setup and name your smaller expense categories to reflect your business
5. Stop using spreadsheets where you have to create new spreadsheets EVERY year
6. Start using accounting software where you just change the date and continue on

I can’t do this for you, but I can help you to figure it out.

Did you skip to the end of this post? That’s ok, here’s a recap:

Start by learning about the two main financial reports that EVERY business owner should be keeping:

The Profit & Loss Report (also called an Income Statement)

A Balance Sheet Report

Learn about 3 big categories that craft business expenses end up in:

• Inventory – all the money you spend on materials and supplies that you buy to create the items that you sell.  The cost of all of those materials and supplies are initially categorized as Inventory and is recorded on your Balance Sheet as an Asset or something your business owns that has value.
• Cost of Goods Sold or Cost of Sales – all the costs that are directly associated with the item(s) you just sold and the money you just received. 
• Overhead Expenses – all the money you spend to keep your business running EVEN if you aren’t selling anything yet.

And then, as you dig through your receipts for the money you spent, ask yourself “what was this for and where does this fit into the big expense categories”?

Want more help learning about how to categorize your craft business expenses?

Sign up for my course “What should you be tracking in your handmade business bookkeeping system”