Basically, you have two types of income:
- Income from the goods and services that you sell directly to others, and
- Money you receive from 3rd parties (ad revenue, commissions, etc.)
It’s really important that you track each of these types of revenue separately.
Let’s talk about income for your handmade or creative business.
I’m betting that you think this is a silly topic for a blog post, but keep reading, you may be surprised!
Here’s a short list of why it’s important that you track each of these types of income separately.
- The money you make from selling finished handmade items, patterns, tech services, yarn you’ve dyed & spun, etc. is considered your Primary source of income
- Ad revenue, commissions, etc. is considered “Other Revenue” because it is not a direct result of what your business is all about
- You want to include just the money you made from selling your goods & services directly to others when you fill out your Sales & Use Tax Return
When you look at your Profit & Loss Report, you want to see:
- The income you made from selling your finished goods or services
- What it cost you to make the goods or provide the services (your Cost of Goods Sold)
- Your overhead or what it costs you to run your business even if you make no sales
- And, lastly any “other” money that your business receives
It’s sort of like a one-to-one relationship:
- You want to know how much you sold
- What it cost you to make what you sold
- And, what it costs you to run your business
- But, above all – you want to know that the amount of money you make from selling your goods and/or services will cover all your business expenses and make a profit.
Anything else is just icing on the cake. And that icing in this case is any other money that comes in, simply because you have a business.
Yes, you’re taxed on that bottom line Net Income amount ….
Which includes ad revenue, commissions, and all those other potential icing on the cake types of money. And it’s that bottom line Net Income figure that you should use when calculating how much income tax money you should be setting aside.
But, there are so many other times when you simply need to know what your sales are.
- Like when it’s time to do Sales & Use Tax Reporting, and
- Your own ability to make sound business decisions – such as could my business survive if the ad revenue & commissions suddenly disappeared
- When you evaluate if you are charging enough for your finished goods and/or services
- Or, when you look at your overhead costs to figure out if you are spending too much money on other things
That it becomes important to have a sound bookkeeping system in place. One that takes the guesswork out of the picture, without doing a lot of extra math.
So, if your current bookkeeping system is a spreadsheet that includes:
- sales tax in your revenue or income – Sales Tax is NOT your money! It’s money that you’re collecting or holding on to until you give it to the Tax Department.
- ad revenue or affiliate commissions in your revenue – that’s your icing on the cake and believe it or not it could go away. At any rate, you simply can’t depend on it to always be there or to be a specific amount.
Get rid of that spreadsheet!
It’s not doing you any favors and in many ways it’s totally wrong.