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Overhead expenses in your handmade business are confusing. Let’s untangle the web of overhead expenses in your handmade business – and no, it’s not about expenses that are literally hovering over your head ?

In a previous post – Keeping track of expenses for your handmade business, we learned that overhead is just accounting speak jargon that means – costs (money you spend) in your business that has nothing to do with the cost of actually making your crafty creations.

Discover the enigma of overhead expenses in your handmade business. Separate from direct production costs, overhead fuels your creative journey—studio rent, website hosting, and more. Navigate this financial landscape to truly understand and account for the backbone of your craft.

Overhead is a term that is thrown around in “cost or manufacturing accounting” – and believe it or not we are manufacturer’s. It’s a crucial concept for us makers and designers – a secret ingredient that adds flavor to our financial reports.  Overhead expenses include ALL of the money you spend to keep your handmade business up and running – expenses that aren’t neatly tied to a specific product.

The cost to host your website is a classic example of an overhead expense. You shell out money to the hosting company to house your online shop, allowing you to flaunt your crafty gems. But here’s the kicker: hosting your website doesn’t have anything to do with crafting a specific piece. Got it? Awesome!  ?

If you rent a studio or space to work in, overhead expenses would include things like:

• rent
• utilities
• taxes
• insurance

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.

Oddly enough, 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 expenses as deductions on your tax return, you should try to recoup a portion of them in every item that you sell.

“But how do I calculate overhead expenses in my handmade business? you ask…..

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.  Your 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 sneaky 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. that draws admirers to your craft fair booth.
• Photography expenses – snazzy photo editing software, props that make your items pop, a reasonably priced camera and that trusty light box.
• Advertising
• Website expenses – hosting costs, website design, logo, banners, etc.
• Education – investments in 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’ve unearthed the total annual overhead expenses 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.

Now you’re equipped to breeze through the overhead maze, Crafting your masterpieces with financial flair! ??

Until next time – Happy Handmade 🙂