When I started a crafts business 25 years ago, I was focused solely on making art. I didn’t know anything about managing money, and I hoped that the finances would just take care of themselves.
Over time, I discovered that taking charge of my business’s financial health was not only easier than I imagined, but also immensely satisfying. It turns out that being “right-brained” doesn’t mean I can’t manage my money like a pro.
Are you an artist or a crafter? Here are five tips for building a prosperous business.
- Open a separate business checking account. The U.S. Small Business Administration recommends that small-business owners separate their personal and business finances. This is doubly important for those who use PayPal or accept debit or credit cards. Beyond making your life easier at tax time (see #4), maintaining separate records and bank accounts is the first step toward taking your business seriously and controlling costs.
- Pay yourself a salary. Now that you have a separate business account, you can pay yourself regularly and leave any extra cash in your business account. The balance in your business account will help you weather the ups and downs of seasonal sales. Meanwhile, your “salary” gives your personal finances predictability. If there are profits left in your business account at the end of the year (or the quarter), you can pay yourself a bonus!
- Calculate the cost of goods sold and set your prices accordingly. Pricing can be its own creative project. Decide what your time is worth (your hourly rate) and measure how long it takes to make each item you sell. If you have employees, add the time they spend to the cost of your time and materials. This simple formula gives you a starting place for pricing: (cost of raw materials x 2) + (creation time x your hourly rate x 3) = retail price. The formula multipliers should cover overhead and the time you spend on marketing and administrative tasks. Remember: Lower prices don’t always equate with higher sales. If your skill and attention to your craft create more value, a higher retail price communicates this to your customers. For example, a search for handmade engagement rings on Etsy brings up items ranging from $8 to $2,495. The price tells shoppers as much about the rings as the photos. Someone looking for a very special ring might very well skip the lower priced items, so underpricing your work could actually keep you from connecting with your ideal customer.
- Take care of taxes every day. A little foresight will make the bite of tax time much less painful. Rather than seeing all cash that comes into the business as income, immediately set aside sales and self-employment taxes. Paying your estimated taxes on time isn’t sexy, but it avoids penalties and reduces stress.
- Chart past sales to predict future earnings. If you have been in business for at least a year, you have valuable data for projecting your earnings in the coming year. Mapping out your past sales on paper allows you to see patterns and create a schedule for acquiring the raw materials needed to produce your wares. Matching spending flow to the ups and downs of sales allows you to anticipate and avoid cash crunches. After a few years of keeping detailed records, you will be amazed by how accurately you can predict your future earnings.
Paying a little proactive attention to your business finances will help you to avoid headaches and give you more time to focus on what you love: imagining new and wonderful designs to delight your customers. Make 2014 your best year ever!