I love a good Top 5 list, don’t you?
After giving it a lot of thought, I have come up with my top 5 reasons why an Indie Craft Business should keep track of their finances. Where are you making money, spending money, and in some cases, not spending money?
Whether you sell fabric or felted fruit, knowing how much inventory you need is a really important part of your bookkeeping cycle. Have you ever heard the term ‘All my money is tied up in inventory?’
I was in that very situation when I worked for a retail operation out of San Francisco. I thought we had plenty of inventory in the store, but not enough money in the bank. The buyers were caught off guard and while I was telling them to stop buying they were saying that we needed product to sell in order to make money.* A total catch 22.
The real question was how much inventory is enough inventory?
There is a way to forecast how much inventory to buy or make, and it is called an ‘Open to Buy’. Using your past sales, plans for future sales and your current amount of inventory you can estimate how much inventory you will need to meet those predictions.
But if you aren’t keeping track of it, you may find all of your money tied up in inventory!
*in case you are wondering what happened, we took a creative approach and made the stores look full by wrapping up empty boxes to fluff it up a little until cash flow was restored.
2. Sales Income Analysis
Let’s say you have 3 different kinds of products/services that you offer. A little zip bag made by you, a PDF pattern for the zip bag, and you teach classes at your local shop.
That is 3 different revenue streams.
You have limited time and limited funds. Where should you focus?
That depends! Which stream earns more money, which is more time-intensive, and which makes you the happiest? You need to keep track of them, and more importantly, spend time analyzing those factors so that you spend your resources wisely.
(I can’t tell you how to track happiness, but I can say you will know it when you feel it!)
3. Cash Flow
How much money do you have? How much will you need?
Checking your bank balance is an obvious place to start, but it only tells part of the story.
You need to take into account the checks you have already sent out but haven’t been cashed yet.
You may have accounts receivable (people owe you money for services/products that you have already provided) that need to be collected.
You may be carrying credit card balances that have a special 0% interest offer on them if paid within a certain amount of time. If not paid, you get the nasty gift of all the interest you would have paid without the special offer coming due on the same day.
You definitely have expenses from the day to day operations of your business – how much money do they cost?
Knowing the answer to these possibilities all comes down to figuring out cash flow. The act of determining how much of the money in the bank is already spent, how much money you can expect to receive, and how much you need to set aside to pay those offers off in time. Keeping track of this information is vital to overall health of your business.
4. Speaking of money… Keeping it all separate.
A lot of Indie Crafters don’t necessarily set out to have a business. They just sell a few items on Etsy, list a few patterns on Craftsy, maybe teach every now and then at their local shop. The line between personal and business can start off very blurry.
But here’s the thing, the IRS doesn’t like that very much, and actually, neither should you!
Even if you are only planning on making a bit of pin money to support your fabric habit, shouldn’t you know how much it is actually being supported? The best piece of advice I can give you is to start keeping track of it today. Keep a running list of how much you are spending and earning, even if you don’t plan to have a full blown business it may blossom into one. Can you remember how much you spent on a zipper that day last fall that is now part of the zippy pouch you just sold on Etsy? Yeah, neither can I. Write it down.
Open up a separate checking account for your business, you can have it under your name or a dba (doing business as), and it makes a world of difference when you start to need that information.
A lot of us use PayPal for online transactions and you should create a separate account on PayPal for your business. You need 2 different email accounts which makes sense because on PayPal that is essentially your account number. You also need to link this account to the separate checking account you just opened. PayPal also offers a debit /credit card for your business account.
You need to pay them. On time.
Now that we have that out of the way you should be keeping track of your taxable income so you can better estimate just how much that tax bill is going to be. During the first year of your business, the IRS lets you wait until tax day to pay your income and self-employment taxes. The second year and thereafter, if your making a profit, then you need to pay what’s known as quarterlies. These are the best estimate of your upcoming yearly tax bill divided into 4 payments paid at the end of each quarter, hence the name.
Think of them as the equivalent to the taxes your employer would withhold from you paycheck if you were working for someone else.
Quarterly Taxes are not difficult to calculate or file, and definitely nothing to be afraid of if you are prepared.
Prepare yourself by having the right amount of inventory to keep your sales strong while not trapping all of your money. Know where to focus your efforts to maximize your return (ie the revenue streams). Keep your eye on cash flow so you have the cash on hand when the quarterlies need to be paid, and having that money in its own account will make it all that much easier.
I hope these five reasons have convinced to start your own bookkeeping today.
P.S. I would be happy to work with you!