Handmade business costs: everything you need to know

Sep 21, 2016 | Handmade Business Tips

deborah_engelmajer_profile deborah_engelmajer_title
Welcome! Want to learn how to build a profitable and successful handmade business and sell your handmade products to the world? You're in the right place! Read more ...


Click here to subscribe
free resource library
read the blog
about and contact page

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!

handmade business costs: COGS, overhead, fixed and variables. Head hurts? Get your free cheat sheet to calculate it all super easily!

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 🙂 

Click here or on the image below to download your free Handmade Business Costs Cheat Sheet.

deborah_engelmajer_profile deborah_engelmajer_title
Welcome! Want to learn how to build a profitable and successful handmade business and sell your handmade products to the world? You're in the right place! Read more ...
Starting an Handmade Biz
yes please!
Crafting a Kickass Brand
show me how!
Marketing Your Handmade shop
exactly right!
Building Your Online Shop
let's go!
Click here to subscribe
free resource library
read the blog
about and contact page

Grow your handmade shop

access the free resource library

Unlock the library of free resources for makers and handmade entrepreneurs and receive weekly tips and freebies to help you craft a profitable and successful handmade shop!

Powered by ConvertKit

You might also like…

Today we’re going to talk about money, but in a way that isn’t going to turn into a math lesson - I promise! I’ve got a free calculator that I’m going to share with you so that you don’t have to do the math yourself. I’ve talked with a lot of shop owners and makers and ask them what their numbers look like - and most of the time I hear crickets. That’s why today we’re going to talk about: how much money you need to make to break-even, how many sales you need to make each month to reach your minimum viable income and take your biz full-time (bye bye 9 to 5) and how to make sure your sales goal is achievable and realistic (so you don't end up working 80 hours a week for nothing). Read now or PIN to read later!
What Will It Take to Reach Your Revenue Goal?
Click to Read
Thanksgiving, Black Friday and Cyber Monday are around the corner and it's the start of the holiday shopping. It's a really important time for makers and handmade shop owners. There is a lot of advice out there on how to make the most out of that holiday season as a handmade shop owner, but there are 3 tips I think aren't talked about enough, and that's what we're going to cover today. Read now or PIN to read later.
Black Friday Success Tips for Handmade Shop Owners
Click to Read
You’ve probably heard me saying how important product photography is when selling online a gazillion times… Well, Whatify can help you determine automagically which of your existing product photos will bring the most sales. That's why today I am joined by special guest Jake Phillips to talk about how to boost your Etsy sales using Whatify. Watch now or PIN to watch later.
How to Use Whatify to Boost your Etsy Sales
Click to Read
Today we’re talking about the top 3 reasons most handmade shops fail and I’m going to give you a few tips to avoid that. This is not about shaming you and telling ‘Oh, you’re doing this! You’re definitely going to fail!’ I’m just here to give you a bit of insight. It’s all about learning from other people’s mistakes. Read now or PIN to read later
The top 3 reasons most handmade shops fail and how to avoid them
Click to Read


Submit a Comment

Your email address will not be published. Required fields are marked *

Pin It on Pinterest