Are You Running An Expensive Hobby? 4 Questions You Need To Ask Yourself

Oct 24, 2018 | Handmade Business Tips

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Today I want to chat with you about the difference between running a business (even if it doesn’t make much money just yet) and having an expensive hobby. This might sound very basic, yet 3 out of 4 makers I talk to on a daily basis fall in the “expensive hobby” category and aren’t aware of it. This means not many sales, and for most… definitely not much profit.

You can watch the video, or read the post below.

First, I want to say this isn’t about the legal definition of hobby and business. I want to make this clear as this can be quite different from what I consider a business and a hobby.

LEGALLY/TAX-WISE:

As for everything, the rules will be different in each country so make sure you know what your country/state definition and rules are. In most cases, even you don’t make a profit, if you
  • went into it with the intention of making profit;
  • work on your shop regularly;
  • plan your activity in a businesslike manner;
you are a business and will have to lodge a tax declaration. This is not the definition of HOBBY or BUSINESS we are using today. Today we are going to call a hobby a shop that’s not set up for a decent profit. And we are going to call a business a shop that (whether you make sales or not much yet) is set up for profit. A shop that has the potential to grow big enough to support you and your family. We’re not looking at the sales but the profitability, the potential for profit and success.

Are you priced for profit?

The first question you need to ask yourself is: are you priced for profit? In my opinion, you need to make money from your shop to actually call it a business. If you make 1500 sales but you’re just or not even breaking even, in my definition of hobby VS business, you have a hobby. If you aren’t making a decent margin of each of the sale you are making – you’re just covering the cost of your expensive hobby. To make sure you are pricing for profit, you need to know:
  • The exact cost of time it takes to create your products;
  • The exact cost of supplies;
  • The exact cost of overhead;
  • The margin for each product clearly defined.
I have a free calculator to help you do the math for you and price your handmade products strategically, and you can download it here.

Do you manage your money the business way?

There are two parts of that. One is bookkeeping and actually managing and organizing everything. The other part is accounting and actual financial strategy. You can’t make proper financial decisions if:
  • you don’t have a separate bank account;
  • you don’t track every single month your key stats and numbers;
  • you can’t predict cash flow issues,
  • you don’t spot expenses increases or aren’t able to understand the inner mechanics of your shop’s finances.
Without that, you can’t really plan and make strategic decisions in your business. You can’t decide whether you can afford to hire a graphic designer or if it’s just a lot of cash sitting there but next month you’ll have to spend it all on supplies. You can’t decide (AND TRACK) how much you can spend on ads/marketing expenses etc. Here’s a free cheat sheet to help you start with accounting for your handmade business.

Do you create products strategically or simply create whatever comes to mind first?

You probably went into the handmade business because you’re creative and love making. That’s completely fine, but the moment you decide you want it to be a business, your product creation has to be strategic. It’s a bit of a mix between the right and left side of the brain. You need to create art that you’re able to apply to a market. Knowing the trends and what’s working and not working for your customers is very important and I feel is often neglected, leaving you more in the “hobby” than “business” category. You can still create whatever you want in your free time, but your products need to be created strategically if you want to run a business. The product collections should be cohesive – your shop should make sense to your customer, and not just be a collection of various, unconnected items. It’s okay to have a range of product, but it should always have something to tie them together. Without that, it’s going to be hard to scale and profit from your handmade shop. If you want to learn how to create cohesive shop collections, you can look here.

Can you walk me through your plan?

If you don’t have a marketing/promotional system in place, if you’re playing it by ear or going with the flow, you need to pause and take a step back and work on that. If you’re running a business and not a hobby, you can’t just rely on your friends and family buying from you and an occasional sale. You need to actively plan and sell your products. It’s one of the parts of business we all probably hate (me included) but if you want to be in business, you need to respect yourself and your work and make a profit out of it. That means you have to have a strategy in place:
  • a clear, detailed plan for the next 3 months: your social media strategy, email marketing plan etc.
  • yearly collection release and marketing/promotions dates. You need to know that 12 months in advance to work backwards and be ready for each. That’s very important because planning, creating collections and promoting is time-consuming and if you were to start thinking about Halloween today, it’s way too late. It’s best to plan your collections and promotions 6 months in advance. Make a plan of the seasons, the dates you want to promote on and work backwards to figure out what needs to be done when. It also triggers questions like: how am I going to market for Christmas? Maybe I should start an email list? Etc.
Here’s an example of a plan to prepare your handmade shop for Christmas. To sum it all up, to have a business instead of an expensive hobby you need to:
  • Price your products for profit;
  • Track your finances and creating a financial strategy;
  • Create products strategically;
  • Have a detailed plan for your shop for 3 months in advance and a general one for the next year.
 
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