If you have a creative hobby that you’d like to turn into a full-time gig, you’re probably wondering where to start and when “it will finally happen” so you’ll be able to quit your 9 to 5. Whether you’re just in the planning stage, or already selling on Etsy or at local craft markets, there’s one thing you need to be clear on: money.
If numbers aren’t your thing and you’ve been avoiding the topic, this blog post is for you. Accounting might not be your favorite part of running your own business but it’s also your key to financial freedom and a profitable shop.
To gain clarity on how to account for your business costs (fixed, variables, COGS, overhead, etc.) keep reading (and don’t forget to download your FREE accounting cheat sheet)!
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BEGINNER FRIENDLY. learn how to account for your handmade business costs so you can make sure you are making a profit: fixed costs, variable costs, C.O.G.S, overhead, all explained!
Fixed costs / Overhead
The first thing you need to be clear on is how much does running your handmade business cost you even if you’re not making one single sale that month.
These costs are called fixed costs because they do not vary according to the numbers of sales you make. In other words, no matter how many products you make or sell on any given month, there will be expenses that you have to pay no matter what. These are your fixed business costs or costs that you have to pay to operate your business.
Another word for it that you might have seen or heard before is overhead.
Fixed costs = Overhead = Operating costs
Fixed costs (or overhead) include things like your studio rent, insurance, monthly plan for your website (hosting or shopify fee for example), office supplies, travel expenses to participate to markets and craft fairs (fuel, hotel, etc.), social media tools (hootsuite, etc.), shipping software, accounting and bookkeeping software or fees, etc.
VAriable costs / cost of goods sold
Variable costs are costs that vary depending on your production volume. The more products you make and sell, the more you will have to pay in variable costs. This is because these costs are directly related to the product creation process.
Another word for variable costs that you could have seen or heard of is Cost of Goods Sold or COGS. This sounds complicated but don’t worry, it isn’t. It’s just a fancy word that accountants love to use to say “variable costs”.
Variable costs = Cost of goods sold = COGS
The reason for it is simple:
If every time you make and sell a product, your variable costs increase, it is like saying that there is a cost to selling this product: something that adds up to your fixed costs and that you wouldn’t have had to pay if you didn’t make and sell that product.
For that reason, variable costs are called “cost of goods sold” or in plain english “what it costs you to sell your products”.
Variable costs include things like: shipping and packaging costs for each product, and raw materials and supplies needed to create your products.
You can also include to your variable costs a percentage of loss for damaged supplies you received and couldn’t use or for pieces that you won’t be able to sell after all because of a defect that came up during the creation process.
LABOR costs / The cost of time
Lastly, it’s important to understand how to account for labor costs.
As a maker, you spend a lot of time actually making your products, and you need to pay yourself for that time. You have to account for it.
Your labor costs are:
Time spent creating a product X Your hourly wage
It will be different for each product.
Labor costs are overlooked by most handmade business owners because it can be hard to know exactly how much time you spend creating each product. But it is crucial to your business as this will affect your pricing strategy, and ultimately your profit. Don’t make the same mistake and run a test: create the same product 5 times and record how long it takes you on average.
NB: if you follow the logic of variables VS fixed costs that I explained above, then you will want to add your labor costs to your variable costs. After all, the more products you sell, the more time you spend producing them, the more you should be remunerated right? Well, no. I know it is counterintuitive to what I just told you about variables costs (COGS) but do not incorporate your labor cost in your variable costs. Keep them separate.
Calculating it all
Ok, now that we’re clear on what is what, it’s time to get to the nitty gritty and calculate your costs accurately. To help you do so, I have created an accounting cheat sheet that will guide you through each step. Do not panic, I made it so easy your nephew could do it 🙂
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