Budget Advice for New Craft Businesses

Dynamic Budgets Are a Key to Success

Every crafter and, for that matter, every business person must learn to control spending from the very outset of the venture. As

a matter of fact, you should not even be in business unless you have drawn up at least a simple business plan and budget. Please read Financing Your Craft Business for more information on business plans.

Below I will talk about three business planning and tracking tools that I use: 1. Budgeting; 2. Income Statement; and 3. Sales Report.

The Business Budget is forward looking and an essential planning tool. But it is also dynamic and subject to change as your home business develops and perhaps veers in directions you hadn't anticipated.

The other two reports are historical and are essential to deciding where to put your efforts - what works and what doesn't work.

Budgeting

Your Business Budget should be grounded in reality and subject to change as circumstances require. Budgeting has to be dynamic and ongoing.

In other words, if your home business' income comes in 20% below projections, expenses will have to be cut to make up for the hopefully temporary shortfall.

One serious mistake a small business person makes in a situation like this is to assume that s/he will make up the income shortfall over time and continue the spending side of the Budget without any adjustments.

Most small home businesses are undercapitalized to begin with, so it really pays to be conservative. I have always tried to make sure that a craft is making enough money to pay for itself before stocking up on more supplies or new equipment. I try to get a substantial down payment if an order would require an investment in new inventory. Everything that I do must be self-supporting.

Just because you work at home does not mean that your home business has no overhead. Phone, electricity, heat, insurance and rent are should be allocated and considered a home business expense. It should be no different than if you had to rent a store or workspace away from your home.

Do some research if you plan to add a new type of craft to sell. Try to determine if there is a market and if it looks profitable. Again be conservative in your assumptions and start out slowly.

Of course, not everything works as planned. On several occasions, a craft I thought would sell well didn’t. But because I didn’t go too far out on a limb buying inventory, the loss was always minimal. If you’re lucky you can even recycle the materials into some other project.

As time passes, you will learn what works and what doesn’t. As you gain this knowledge, you should be making adjustments to your Business Budget to reflect reality.

Income Statement

Making adjustments to your Budget and your home business are much easier if you keep careful records. You can use a simple spreadsheet or one of the small business software packages I recommended in Taxes & Accounting Software. You can even use paper and pencil if you're not comfortable with a computer.

If you track the cost of your materials, the costs of marketing the products and the actual income you receive, you will know if your Business Budget is on track, if you can afford the new tool you want or if you should stock up on more inventory.

You will also be able to decide if your home business should branch out or change direction. As well, you will be able to track which craft venues and fairs do well for you.

The bottom line is that you cannot afford to throw money at your work at home business. You must try to work around obstacles in a cost efficient manner. While your results will probably reflect a short period of losses at the beginning, losses cannot be allowed to go on unchecked.

Every expense must be justified; you must expect to get back more in income than you are paying out. I track my income and expenses with a cash basis Income Statement. An Income Statement can also be set up using average costing but I believe cash basis is more appropriate for a small business.

For example, if I need to invest $500 in a serger, that negative $500 will show up in my Tote Bag Income Statement until I've sold enough bags to cover the expense and get back to profitablility. This gives me a real incentive to concentrate on that product line and justify the expense.

My cash basis Income Statement, itemizes every penny I spend and earn by date. This helps me guard against getting too heavily invested in inventory and tools. I categorize expenses and income by product line (e.g. Paper Goods, Jewelry, Tableware, Tote Bags and Purse Organizers, etc.). At the bottom of each product column, I calculate the product line's profit margin (1 - expenses/income).

For example, if I've earned $133 and spent $72, my profit margin is 1 - 72/133 or 46%. On the other hand, if I just bought that serger and have only sold 10 tote bags at $15, my profit margin is 1 - 500/150 or (a negative) -233%! But, in truth I wouldn't have bought that serger if I didn't have orders in hand and that brings us to my final business planning and tracking tool, the Sales Report.

The Sales Report

My Sales Report is simple yet powerful. I list my sales by date in one column. I don't break out the product lines here. This is Total Sales and allows me to track my home business month by month.

I can identify trends, both seasonal and product trends. I can identify which venues work well for which product. And I can plan how to finance my expenditures.

Below today's date, where Total Sales to Date are calculated,I have added a section of unfilled and prospective orders. You see, when I bought that serger, I had an order for 100 tote bags.

By looking at the prospective order section of my Sales report, I could see that I would "soon" have $1500 of income - enough to pay for the serger and provide a sufficient profit margin even after considering the other expenses to produce the bags.

Careful, consistent tracking of your business' Income, Expenses and Sales and a dynamic Budgeting process, one that is adjusted to reflect experience, should be major tools that you use constantly in your decision making processes for your work at home business.

If you use them, you should be able to avoid the fate of most small businesses - failure.