Business expenses fall into two categories - Cost of Goods Sold and Overhead

Keeping Track of Expenses for Your Handmade Business

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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.

The biggest list of things that you’ll spend your time recording will be business expenses and you may be surprised at just how many expenses you really do have. In this post, we’re going to do a basic overview about what sort of information you should be keeping track of in your swanky new bookkeeping system.  Keep in mind everything is important, you’ll use this information you gather and keep track of either for tax purposes 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!

The biggest list of things that you’ll spend your time recording will be business expenses and you may be surprised at just how many expenses you really do have.

We’re going to separate our expenses into two pretty basic categories – Finished Object related expenses and non-product related expenses.

Finished object related expenses – also known as Cost of Good Sold in accounting speak.

Several things go into Cost of Goods Sold:

  • Direct materials and supplies – there are the things (costs) that go into making your finished items.  This could be yarn, fabric, ribbon, polyfil, child safe eyes, etc.
  • Indirect materials and supplies – these are things (costs) that also go into making your finished items, but they aren’t so easy to keep track of like thread, glue, a little sprig of silk flowers.  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 – these are the items that you use to create your finished items with, they aren’t literally part of the product itself, but you couldn’t make your handmade item without them.  Examples include:  hand sewing needles, crochet hooks, knitting needles, scissors, pliers, even a sewing machine.
  • Fees – these are all those sneaky little fees involved with selling your finished items.  Examples include:  Etsy listing fees, Etsy’s share of your sale, PayPal charges, credit card fees, craft fair booth fees, etc.
  • Shipping, Packaging & Postage – these are all the fees involved in getting your finished items delivered to your customer.  Examples include:  boxes, padded mailers, labels, envelopes, postage scale, decorative packaging, as well at the actual price of the postage.

Our expenses fall into two categories. Cost of Goods Sold and Overhead. Learn about both.Non-product related expenses – also known as Overhead in accounting speak.  These are all the OTHER costs associated with simply running your business.

Overhead consists of a LOT of things:

  • Licenses & legal fees – for business licenses, permits, registration
  • Display expenses – stands, tags, racks, tables, tent, etc.
  • Photography expenses – photo editing software, props, a camera, or a light box
  • Advertising
  • Website expenses – web hosting costs, website design costs, logo, banner, etc.
  • Education – business education (seminars, webinars, e-courses, books, etc.
  • Professional fees – consulting services, tax preparation, etc.
  • Travel – cost of 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 – perhaps you belong to different organizations that are subscription based, meaning you pay a monthly or yearly fee to be a member.  Examples include:  The American Crochet Association (ACA), The Yarnpreneur Society (YPS), or The  Craft Industry Alliance (CIA).

These are just some examples – we’ll delve more into this in the next article – where we’ll dig a little deeper into overhead expenses.  I just wanted to show you that your business can (and definitely will) have a lot of different expenses and you need to be recording all of them – consistently.

Tracking expenses has two very important purposes:

  1. You’ll be able to tell if your business is really making money or not, and
  2. 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 “fun” of owning your own business. You can “design” your system to be a reflection of you and your brand.  Think of:

  • a color-coded spreadsheet with fun fonts?
  • a snazzy painted file cabinet to store your receipts and paperwork in

Do something fun to keep you motivated to consistently update your financial information.

Ok, so are you ready for a little bookkeeping type homework?  Sure you are!

Throwing receipts in a box is NOT bookkeepingGo dig out that box of receipts that you’ve got stashed away (don’t look embarrassed, I knew you had one!) and start going through it.  Make a list – I don’t care what you use to make it with – of all the “types of things” you spent money on and while you’re at it, separate things by month, so you have 12 little (or big) piles.  After you’ve made the list, go back through it and code things as COGS (Cost of Goods Sold) or Overhead.

Was that really so bad?  Don’t you feel better now?

The biggest list of things that you’ll spend your time recording will be business expenses and you may be surprised at just how many expenses you really do have.

So, what did you think of this post? Feel free to leave a comment below.