Overhead expenses in your handmade business are confusing – it doesn’t mean that they are expenses that are literally over your head 😛
In a previous post – Keeping track of expenses for your handmade business, we learned that overhead is just an accounting speak term that means – costs (money you spend) in your business that has nothing to do with the cost of actually making your finished item.
Overhead is a term that is used in “cost or manufacturing accounting” – and believe it or not we are manufacturer’s (more on that later). Overhead expenses include ALL of the money you spend to keep your handmade business up and running – that you can’t associate with a specific finished item or product.
The cost to host your website is an example of an overhead expense, you pay the hosting company to house your website so you can sell your finished items. It’s a cost to your handmade business, BUT hosting you website has nothing to do with making a specific item. Make sense? Good 🙂
If you rent a studio or space to work in, overhead expenses would include things like:
These costs are associated with you being able to keep your handmade business running, without them you probably wouldn’t even be in business – but the money you spend isn’t money that goes into your finished products – for example, you can’t figure out exactly how much electricity you used to make that lovely shawl.
Most handmade business owners don’t take into consideration the cost of their overhead expenses when they price their finished items. While you can take just about any of these costs as deductions on your tax return, you should try to recoup a portion of them in every item that you sell.
How do I calculate overhead expenses in my handmade business?
Start by adding up all of your expenses on a monthly basis, then total them quarterly, semi-annually and yearly. This way you have the big picture in front of you. Expenses would include:
- Small tools, machines, and patterns that you buy and use to create your finished items with. While they aren’t literally a part of your finished items, you couldn’t make them if you didn’t have them.
- Indirect materials and supplies – these are the little things that you use all the time in your finished items but they are just too much of a pain to keep track of. Thread, glue, a little sprig of silk flowers, a one-inch square of felt. You know you used them, but it’s difficult to know the exact amounts
- Licenses & Legal fees – business licenses, permits and registration
- Display expenses – stands, tags, racks, tables, tent, etc.
- Photography expenses – photo editing software, props, a reasonably priced camera and light box.
- Website expenses – hosting costs, website design, logo, banners, etc.
- Education – seminars, webinars, e-book courses, books, etc.
- Professional fees – consulting services, tax preparation
- Travel costs – mileage or gas for driving to the post office, the craft store, to exhibit at a craft fair, attending a business meeting, lodging for staying overnight for any of these reasons, meals when you are traveling for any of these reasons.
- Memberships & Dues – monthly or yearly membership costs that you pay to an organization. Let’s say you joined The American Crochet Association in order to learn to crochet better, The Yarnpreneur Society to learn how to start and run a yarn related business, or the Craft Industry Alliance to keep on top of current trends. All of these would count.
Here’s a pricing tip:
Once you know what those total annual overhead expenses are for your handmade business take that amount and divide it by 8,760 (the total number of hours in a year) – this gives you an hourly cost that you can then add to your own fair hourly wage.
Until next time – Happy Handmade 🙂