You’ve got an Etsy shop, a website, you do craft shows or you do all three.
You think you're doing okay.
I mean, you’re making stuff and it’s selling!
But how do you know if, when and how this can become your dream business?
We'll be giving you a map that shows you how!
It's like painting by numbers – you draw your own map with the help of magical formulas and numbers we'll give you.
Don’t panic!
Formulas are your friends.
You enter numbers in them and they provide the answers to your burning business questions, like how do I price my things?
Simple! You use a pricing formula.
(Cost of materials + cost of labor) x 2 = Wholesale price
Wholesale price x 2 = Retail price
Here's a secret about formulas that no one talks about:
If you leave anything out of your costs or under value your labor you may get results that aren’t ideal.
Garbage in, garbage out.
So let's talk you through how to draw your own map!
Your Goal with Your Business
First, you need to figure out what your goal is.
This is what you want or expect this business to do for you.
It could be just to make a little extra cash on the side or it could be for it to become your full time career.
A goal is worthless if you don't know the Five Numbers associated with it to make it a reality.
Here are the Five Numbers.
The 1st Number: Your Monthly “Salary”
Add up what you actually need to live on.
Include every necessary cost for living, like:
- savings
- loan payments
- taxes
- insurance
- rent/mortgage
- groceries
- cable
- phones
- clothing
- recreational activities
If you share a household, determine what your contribution has to be.
If you don’t really need (for your survival) to make anything from your business, determine what you want to make for:
- extra savings
- vacations
- a new car
- kids' extra-curricular activities
- home improvement
The idea is to figure out what your “take home” from your craft biz needs to be for you to meet your financial obligations and/or your financial desires.
Make a simple spreadsheet that lists all those expenses and total it up.
You can use yearly totals and divide by 12 to get a monthly picture.
As an example, we’ll say you determined you need $2,000 a month to live on.
The 2nd Number: Your Business’ Fixed Expenses
Fixed Expenses are the expenses your business incurs to operate, like rent and utilities.
This is known as overhead.
You might be a home based business. In that case, some or all of the overhead is part of the household expenses listed in “Salary” above.
But you still have fixed business expenses like:
- Shopify monthly plan
- Shipping software recurring payment
- Social media automation tools
- Traveling and accommodation for your out of town shows
- Office supplies
- Insurance and licenses
- Professional fees if you use a CPA or attorney
If you have an expense you don't know how to categorize, I recommend including a miscellaneous expense line for everything else.
It's much better than not including it at all!
Use a simple spreadsheet to list all the expenses and total it up.
Stuff you pay yearly like insurance gets divided by 12.
You may also not buy office supplies each month, so use last year’s total divided by 12.
You can estimate if you haven’t been in business that long, but as soon as you have real data, you’ll need to revisit the total.
OK. DID IT, ARE WE THERE YET?
You've got two numbers now:
- What you need to live on; your “salary”: $2,000 per month
- Average monthly overhead: $1,000 per month
What does this mean?!
Your business must generate enough revenue to cover a total of $3,000 in total expenses.
Turns out you sold $3,000 worth of products last month.
Woohoo!
Hold on to your horses. Hold on to your calculators!
We just calculated Fixed Expenses. But you haven’t yet factored in your Variable Expenses.
Fixed Expenses are always the same every month regardless of how many pieces you made.
Expenses can be variable because these are directly tied to the number of pieces you make.
These expenses are also known in accounting lingo as your “cost of goods sold”.
Like this infographic? Pin it!
The 3rd Number: Your Cost of Goods Sold
Variable Expenses or Cost of Goods Sold (or COGS) is the total of:
- material costs to make your product
- shipping supplies
Double check them and make sure you include shipping costs for materials you bought and any special boxes or packaging you use per piece.
You should factor in a small loss percentage to account for materials that go bad, pieces that aren’t sell-able, etc.
For the purpose of creating your Dream Business Plan, don’t include your labor here (unlike the pricing formula).
Here's why.
You’ve established what you need to take home from your business for survival, your “salary”. That's the first number you calculated!
And accounting programs treat wages and salaries as expenses and not part of the actual COGS.
You should total the cost of goods per each item you make.
But the number we want to look at right now is the total for all your sales per month.
If you have last years’ numbers, you can take a short cut and grab the total dollar amount spent on materials and packaging and divide by 12.
For simplicity's sake, we're going to assume you only make and sell one design.
This item's COGS is $5.
Remember, this includes:
- materials and supplies used
- shipping to get your materials to you
- packaging
The 4th Number: The number of goods that you can produce monthly
This number depends on how you make your products.
The simplest formula is:
How many items you can make per hour x How many hours you can spend in production
The end result you want is the number of pieces that can reasonably produce, ready to sell, per month.
You figure you can make 5 pieces per hour.
You’ve priced it at $20 wholesale ($40 retail).
The 5th Number: The Sales You Need to Meet Your Goal
Sales – COGS = Profit
If you sell one piece wholesale, your profit is $15 (that's a $20 sale minus $5 in COGS).
Divide $3,000 (your monthly total expenses) by $15 and you get 200 pieces
Let's figure out the profit:
200 pieces x $20 wholesale price = $4,000 gross sales
$4,000 gross sales – $1,000 COGS (200 pieces x $5) = $3,000 profit
Can you make 200 pieces per month to get you the $4,000 gross sales?
5 pieces made/hour x 2 hours/day = 10 pieces/day
10 pieces/day x 20 work days/month = 200 pieces per month
Technically, yes.
Only you will know if such a production schedule works for you.
You can always increase the hours per day or the days per month you work in production.
Putting the Five Numbers Together
In this example, you now know how many pieces you have to sell per month to meet your financial needs.
And you have a picture of where you can make changes to make it happen.
For instance, we used wholesale prices above, but you’d only have to sell 100 pieces at retail.
Then you can ask yourself:
Is selling to 100 individual customers buying one piece at a time more likely or less likely than selling to 10 wholesale accounts that purchase 20 at a time?
Now you have an idea about where to focus your sales and marketing efforts.
Knowing these numbers, and changing them when things change (like your cost of goods go up, or your rent is raised), keeps you focused on your goal.
You want to look at your profits regularly and check to see if they're covering business overhead and your salary (take home goals).
This is your first step to creating the financial map that keeps your business on track with your goals.
By the way, it’s also called a business plan.
You just made one! :)
This post was written by Melissa Kaye Zeppa based in Perisburg, VA. For 25 years (that's 175 in dog years!), Zeppa Studios has been designing and producing unique and whimsical animal themed giftware and accessories featuring original artwork by studio founder, M. K. Zeppa.
Leave a Reply