Keeping track of expenses is vital for your handmade business. By categorizing expenses into Cost of Goods Sold (materials, tools, fees, shipping) and Overhead (licenses, displays, advertising), you gain clarity on your business’s financial health. With consistent record-keeping, you can determine profitability and optimize tax deductions. Embrace the creative aspect of bookkeeping, design your system to reflect your brand, and make it fun to stay motivated. Start by organizing receipts and coding expenses as COGS or Overhead. Take control of your finances and unlock the potential for business success!
Keeping track of expenses for your handmade business is just one piece of your bookkeeping, accounting, record keeping, or whatever you choose to call it.
In our last blog post, we talked about why you need to do bookkeeping for your handmade business.
In this post, we’re diving deeper into the world of keeping track of expenses for your handmade business by doing a basic overview about what types of expenses you should be keeping track of in your swanky new bookkeeping system.
Don’t worry, it’s not as daunting as it sounds!
Keep in mind everything is important and you’ll use this information you gather and keep track of either for:
- tax purposes
- determining if your business is making a profit
- or for your own pricing calculations.
You need to keep track of the money you are spending or it is just going to be flying out of your pocket and out the proverbial door!
Let’s talk about the two main types of expenses you’ll have in your handmade business.
First things first. Let’s talk about the two main types or categories of expenses you’ll have in your handmade business – those directly related to your finished items or patterns and those that keep your business running smoothly. You may be surprised at just how many categories you really do have!
Finished Item-related Expenses (also known as Cost of Goods Sold)
These types of expenses include all the money you spend to make, sell, and get the finished items to your customer.
Here is a list of categories that you might want to have in your bookkeeping system and what belongs in each category.
- Direct materials and supplies. This category is all about the cost of the materials and supplies that go into creating your beautiful handmade items. Think yarn, fabric, ribbon, polyfill, and even those adorable child-safe eyes.
- Indirect materials and supplies. These are the sneaky ones. Things (costs) that also go into making your finished items, but they aren’t so easy to keep track of – like thread, glue, or a little sprig of silk flowers that adds an extra touch of magic. You know you used them but you can’t always tell exactly how much (say feet, inches, drops, etc.) you actually used.
- Tools, machinery & patterns. Let’s not leave out the trusty tools, machinery and patterns that help you to bring your creations to live. These are the items that aren’t literally part of the product itself, but you couldn’t make your handmade item without them. We’re talking about essential things like hand sewing needles, crochet hooks, knitting needles, scissors, pliers, and maybe even your trusty sewing machine.
- Fees. These are those sneaky little rascals that come with selling your finished items. These include listing fees on platforms like Etsy, the share of your sale that goes to the platform, PayPal charges, credit card fees, and fees for renting a booth at craft fairs.
- Shipping, Packaging & Postage. Don’t forget about the fees involved in getting your finished items delivered to your customer. This covers everything from boxes and padded mailers to labels, envelopes, and the actual cost of the postage.
Non-product-related Expenses (Overhead)
Now, let’s focus on the nuts and bolts of running your business. This category includes expenses beyond your finished items.
Overhead consists of a LOT of things:
- Licenses & legal fees. The necessary steps to keep your business on the right side of the law like business licenses, permits, registration
- Display expenses. You’ll need a beautifully presented booth for craft fairs. Think stands, tags, racks, tables, and maybe even a snazzy tent.
- Photography expenses. To capture the essence of your creations. You might need photo editing software, props, a camera, or even a fancy lightbox
- Advertising. Maybe you need business cards, hang tags, or even printed brochures.
- Website expenses. Don’t forget the cost of your online presence. Things like web hosting costs, website design costs, logo, banner, and anything else that keeping your online sop running smoothly.
- Education. As a savvy craftpreneur, investing in education is vital. These expenses cover business seminars, webinars, e-courses, and inspiring books that fuel your growth.
- Professional fees. Sometimes you’ll need professional help, like consulting services, tax preparation, a trademark lawyer, and these services come with fees.
- Travel. Travel expenses are also part of the game – mileage or gas for driving to the post office, to the craft store, to exhibit at a craft fair, attend a business meeting, lodging for staying over night for any of these reasons.
- Professional membership. If you’re a member of professional organizations like The American Crochet Association (ACA), The Yarnpreneur Society (YPS), The Craft Industry Alliance (CIA), or the Crochetpreneur Business Academy, don’t forget those subscription fees!.
PHEW! These are just a few examples of the expenses you might encounter.
In our next article, we’ll talk about how to keep track of costs as you’re creating your finished items or patterns – so stay tuned!
Here’s some “secrets” to make keeping track of expenses in your bookkeeping more enjoyable.
The reality is that tracking expenses for your handmade business has two very important purposes:
- You’ll be able to tell if your business is really making money or not, and
- you’ll be able to use most of these expenses as deductions when you file your tax return
It may help you if you think of your bookkeeping system as an extension of the creative spirit. You can design it to reflect your unique brand and personality. Image:
- a color-coded spreadsheet with fun/playful fonts
- a snazzy painted file cabinet to store your receipts and paperwork in
Find something that sparks joy and keeps you motivated to update your financial information regularly.
Fantastic! Let’s embark on a little bookkeeping adventure.
Grab that box of receipts that you’ve got stashed away (no shame in that!) and let’s sort them out.
Create a list of all the different types of expenses you’ve incurred, and to make it even more organized, group them by month. You’ll end up with 12 neat piles, each representing a months worth of business expenses. Once you have your list, go back through the receipts again and categorize each one as either COGS (Cost of Goods Sold) or Overhead.
Look at you go! Wasn’t that empowering? You’re on your way to becoming a master of expense tracking, and your handmade business will thank you for it!
Need more help with categorizing your expenses for tax time?
Check out the Handmade Business Bookkeeping 101 Challenge course ($97.00), where you’ll learn:
- about what makes a bookkeeping system GOOD
- take a deep dive into the Expense categories found on the Schedule C and the Canadian T-2125 Tax Returns and then we’ll look at a lot of specifics like – if you buy a website plug-in it goes HERE and if you buy a course to learn how to do something business related, it goes HERE
- dive into the Inventory section of the Schedule C and the Canadian T-2125 Tax Returns and why it’s important to have a good inventory system in place
- how to calculate Cost of Goods Sold for a specific item and then we’ll take a deep dive into the Cost of Goods Sold section of the Schedule C and the Canadian T-2125 Tax Return
- and a bonus training session I’ll show you how the cost to make an item or design a pattern influences your pricing.
OR, GET THIS COURSE (AND MORE) FREE, WHEN YOU JOIN THE HANDMADE BUSINESS BOOKKEEPING ACADEMY!
This post was originally published on 10/28/2017 and was updated on 7/16/2023.