Myth: Bookkeeping for handmade businesses is simple. Just charge 3x your supplies and count 66% of your gross sales as profit (net).
Truth: Ummmmm, no. Just no. Don’t do that.
While tracking income and expenses for a small, handmade business is more complex than a simple formula can provide, it doesn’t have to be mind-boggling. And with my Bookkeeping for Handmade Businesses spreadsheet, you can be on your way to tracking profits like a pro, in no time.
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Why Bookkeeping is Important
I am not an administrative kind of person. In fact, like most creatives, I prefer to put important papers in a pile and leave them be until the fairies or elves or Mary Poppins comes by to take care of them. Ignorance is bliss, right?
Well, not really. In fact, ignorance can tank your business faster than you cat can unravel your latest WIP when you turn your back….like, in a millisecond.
How, you ask? Well,
- if you’re only guessing at your numbers, you actually have NO idea what is going on in your business..what works, what doesn’t work…or if it’s working at all,
- as a business owner (according to the laws of your locale), it is your responsibility to pay sales tax and failure to do so could have the taxman calling sooner rather than later (you don’t want this!), and
- if you don’t have to worry about sales tax, you still have to know your numbers in order to report your personal income.
I know it would be so easy to simply take cash payments, guesstimate your profits, and treat yourself to some fancy new yarns….but that’s not how any of this works. Your integrity as a business owner is on the line….and your business is on the line.
So, let’s do this right.
Disclaimer: I am not a tax professional and, while I currently use Quickbooks for my bookkeeping, this is the way I tracked my income and expenses for years…on a good ole Excel spreadsheet. If you have questions or concerns, please consult an accountant.
Preparation is Key
OK, we’ve all seen the images of business owners walking into the accountant’s office, disheveled, sweat covering his brow, carrying a box of receipts under his arm. This guy is stressed! We’re trying to ensure that you don’t have to deal with that kind of stress.
Instead, with a little preparation, you’re going to approach this bookkeeping thing with confidence. K?
While you still might be saving your receipts in a shoe box, there’s a few more pieces of documentation you’ll need to get your books in order…and I suggest you do this at the end of each month so it doesn’t become overwhelming.
I know, some people do their bookkeeping as they go along…marking their expenses every day…I’m just not built that way, but if you are….go for it!
Documents You’ll Need
I don’t know about you, but when it’s time to do my bookkeeping, I need paper. I just can’t manage 10,000 tabs open on my computer and the constantly getting logged out of my bank account every 10 minutes. So, I print everything….yes, I said it.
Feel free to do this online, if that works for you. Either way, you’ll need these documents for the previous month:
- Bank statements for your business accounts (checking, savings, other)
- Credit card statements for your business
- Online sales reports (For me, this means: Etsy, Ravelry, Shopify, Send Owl, Thinkific, Square, and PayPal, etc.)
- Offline sales receipts (This will be my tally of any in-person sales)
- Monthly sales reports from all affiliate networks and other affiliate accounts
- Monthly reports from advertising networks
- Monthly statement from Etsy to track expenses (This shows listing fees, marketing fees, shipping fees, and transaction fees. Direct checkout fees are noted on the sales report, above.)
- Other: every business is different and you may have other sources of income you need to track as well.
As you know, I always advocate having a variety of income streams. That can make tracking income more difficult that simply knowing your sales numbers, but it’s important to have a variety of revenue streams in order to have a thriving business.
Depending on your avenues of income, you’ll want to make note of:
- Transaction-based Revenue: This is revenue garnered from the sale of goods whether online or in-person.
- Service-based Revenue: Just like it sounds, this is revenue generated from the provision of services like teaching crochet and tech-editing.
- Project-based Revenue: This would be for payments received for one-off projects like sponsored blog posts.
- Recurring Revenue: This is ongoing revenue received from things like subscription fees, advertising, and affiliate agreements.
Entering Revenue on your Bookkeeping for Handmade Business Spreadsheet
Start on the Revenue tab of your Bookkeeping for Handmade Business spreadsheet. Sales figures and add a line item for any additional income streams. Then, enter the associated monthly revenue. See, easy peasy.
Tracking Cost of Goods Sold
Cost of Goods Sold (COGS) is the sum total of the direct cost of producing your items that are sold and providing services throughout the year. Items included in COGS are
- Materials cost (all that yarn and the cost to ship it, product tags, packaging but not shipping materials),
- Labor cost (like contract crocheters), and
- Overhead (like rent or utilities for a manufacturing facility).
When doing your bookkeeping, you’ll notice that Revenue – Cost of Goods Sold = Gross Profits and, yes, that looks like, “If I simply deduct the cost of my materials from my sales, I’m all set!”
But, gross profits isn’t the end of the story….and not even the end of COGS.
You see, COGS applies only to goods and services sold over the course of the year. It does not include materials purchased for products that have not yet been sold. This is why we must take an inventory at the beginning/end of each year.
The basic calculation for cost of goods sold is:
- Value of beginning inventory
- Plus cost of materials, labor, and factory overhead (you probably don’t have factory overhead so I’m not including it in the spreadsheet)
- Minus value of ending inventory
- Equals cost of goods sold for the year
On our spreadsheet, we’ll track the materials and labor costs monthly and it will all come together at the end of the year. Let’s get started tracking COGS and, then, move on to the meat of the spreadsheet.
Entering COGS on your Bookkeeping for Handmade Business Spreadsheet
Click on the Cost of Goods Sold tab of your bookkeeping spreadsheet. Enter the value of your beginning inventory.
Remember, inventory is calculated at the cost to make each item, not the retail price of the item. You’ll also need to track your inventory of supplies. So, all the cost of all that yarn on your shelf needs to be accounted for, as well.
Finally, at the end of the year, enter the final value of your inventory. There you have it, your total Cost of Goods Sold!
For most entrepreneurs, tracking expenses is the most difficult and confusing part of bookkeeping for their small business. Just take a deep breath and walk through it step by step.
The types of expenses you’ll be tracking will vary based on your unique business. However, things you should track include:
- Capital expenses: business startup costs, business assets (your accountant will know what to do with these),
- Sales and excise tax paid,
- Business insurance,
- Marketing, advertising, and promotion expenses
- Charitable contributions,
- Membership fees for trade organizations,
- Credit card convenience fees,
- Internet-related expenses,
- Legal and professional fees,
- Tax preparation fees,
- License and regulatory fees,
- Subscriptions (these include publications, software and application subscriptions),
- Supplies and materials not otherwise included in COGS like:
- Office supplies,
- Shipping supplies,
- Equipment (talk to your account about amortization for equipment),
- Utilities (for business use only),
- Online seller fees,
- Shipping fees,
- Education expenses (may be deductible, speak with your accountant about this),
- Food (again, speak to your accountant about this one).
Entering Expenses on your Bookkeeping for Handmade Business Spreadsheet
Click on the Expenses tab of your bookkeeping spreadsheet and enter your expenses monthly.
Notes for Tax Time
- In some cases, it is not required that you have a separate business checking account, but, please, take my advice and set that up as soon as you beginning selling. It will make your life so much easier.
- As mentioned earlier, establish a way of saving your receipts so you can refer to them when sitting down to work on your spreadsheet, when you visit your accountant, and in the rare instance that the taxman comes calling. I prefer to sort my receipts by month.
- I am neither an accountant nor a tax attorney. I just provide this information as a basis for your recordkeeping. If you have questions, please consult a professional.
- Business use of the home will be calculated with your accountant at tax time. You’ll want to track all your home expenses, including repairs and improvements, separately.
- Mileage used for business purposes can be deducted when tracked meticulously throughout the year. I suggest keeping a page in your planner specifically for this purpose.
I hope you’ve found this article helpful. I know that bookkeeping for your small business can seem intimidating and stressful…yes, I’m still a little grumpy on record keeping day…but it is a necessary part of being a business owner.
Do yourself a favor and commit to tracking your revenue and expenses each month. Then, reward yourself for a job well-done! I recommend more yarn.