One of the biggest areas of mindset change when it comes to owning a craft business is the idea that tracking business expenses is a good thing. At the beginning if we aren’t careful, we are all susceptible to overspends and it’s when these moments become habits that we find ourselves in real problems.
Today on the podcast I want to give you 5 reasons why you need to know your expenses, so that you can keep your business on track!
Why we forget to track business expenses
In my experience with coaching clients and conversations with fellow stall holders at shows one of the trickiest things about starting out is changing the view that we have gone from hobby to business in every sense. You see it’s not just about making products to sell, instead of making for pleasure, it’s also about making the selling of those products profitable enough to pay yourself a wage and to sustain the business for the long term. Tracking business expenses is a great way to safe-guard the money in your business, because it raises your awareness to how it is currently utilised compared to it’s most effective utilisation.
Why are business expenses so important to track?
According to Score 82% of small businesses will fail due to cashflow problems which can be caused due to lack of budgets, or mindfulness on spending habits as well as things like cash getting stuck in endless inventories of raw materials or unsold product (new makes, or old lines).
Tracking your expenses can be done with a simple spreadsheet, or online cloud-based software and you should have one or the other option in place regardless of whether you send your receipts to an accountant or not. Why? Because you own a business now and just as much as you need to understand how to make your product, you also need to know how much you are spending vs. what money you have coming in from sales.
Still on the fence about why tracking business expenses is a good thing? Let me give you five very good reasons.
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5 Reasons Why You Need to Know Your Business Expenses!
Budget creation is finance mindfulness – The best way to organise yourself when it comes to finances is to set yourself a budget for things, which if I’m honest at the beginning can be a difficult thing to do, because how do you know how much you should be spending, right?!
I like to start clients off with a more mindful approach, so I encourage setting up a tracking system in the early stages of their business, which they can then monitor on a weekly basis. This allows them to become more mindful of how money works in their business and what their own attitude is towards spending. Do they need to scale back, or invest, and when to invest… these are some of the questions that good tracking can help answer.
I take this further by asking them to consider every purchase from a different perspective – Do you really need that right now? Is this an essential purchase? As clients get deeper into their business, I would expect them to put budgets in place that replace these questions with a stricter approach to spending. It’s not because I want to take the fun out of working for yourself, but that actually I want to show you what running a business is all about and that keeping an eye on the details is crucial to your long-term survival.
Getting into a more mindful routine early on helps you spot money problems earlier. So even if you hand your receipts over to an accountant it is good practise to have a system going where you can keep track of your spending yourself. Remember for most self-employed businesses an accountant is someone who helps you file your taxes and recommend changes after the fact, they are not responsible for your financial decision making through-out the life of your business. YOU are.
Profit margins should be protected – Tracking expenses can help you protect your profitability from over spending.
A products’ profit margin is calculated based on the direct costs and indirect expenses relating to the product manufacture and sale. It doesn’t always include accurate incurred expenses elsewhere in the business. So, every time a bill comes in that your product profit margin doesn’t cover the expense eats into your business profits. Keeping an eye on costs allows you to control how much of your hard-earned profit you get to keep and use in other ways, like paying yourself a wage, or investing in new lines.
Growth can increase costs rapidly – Costs and expenses will increase during your business life, the basic rule of change is usually due to inflation, or other financial charges like rises in VAT, or a change in supplier.
When you are in a growth spurt your business will also be much more demanding of your money. I remember when I started to scale my craft business early on, on eBay, I needed to invest in a wider stock range and deeper stock levels from my suppliers. This investment helped to accelerate my growth, but it also accelerated my costs and supplier bills suddenly jumped from £200 here and there to a regular £1,000 per month.
Later on, when I changed my business ethos to a more handmade approach, this too saw costs rise from new supplier inventory.
If I had not kept a close eye on tracking my business expenses I could have easily gone bankrupt with overspending, because my money was tied up in stock and raw materials which is not a good thing!
You can pay yourself a wage – As artists we are really bad at coming to the conclusion that we should in fact be paid for our work. Rarely have I come across anyone who sees their worth straight-out-of-the-gate and so when I ask new clients with early stage businesses, ‘how much are you earning per month’ there’s usually a long silence before an excuse about why they aren’t doing it.
Regardless of whether you perceive your business being no more than a ‘hobby that pays for itself’, or ‘something that will pay out in time’, the moment you put something up for sale is the start of your business (and for tax reasons is actually before you put that item up for sale, it’s at the moment of inception). Every business needs to pay its staff and so you need to pay yourself!
Admittedly it might not be much at the beginning but taking this seriously from the outset means that you are starting to be financially mindful about your approach to business matters and the figures that make your business work. I believe it can also help you to create better sales and marketing strategies because you know exactly what to push in order to meet the desired wage you want each week.
The other thing that we forget is to sit down and work out how many of our products we need to sell to provide us with our desired wage per week. Understanding your figures, which includes your expenses can help you calculate this much more easily.
Helpful during tax season – A good accountant can be really helpful when it comes to categorising your receipts in a way that means you pay just the right amount of tax owed each year. For most of us small business owners, particularly at the beginning of our businesses an accountant is an expense we cannot afford and so taking the time to do our taxes each year can feel like a bit of a nightmare task. Keeping on top of your figures weekly allows you to be in a much more organised position to get through the task of taxes in a much less overwhelming way.
Having an understanding of how important tracking business expenses is, is a really enlightening thing. It helps you to see how you can be more effective in so many other important areas in your business from budgeting to long-term sustainability. From growth planning to sales and marketing strategies and so much more. This is much more likely to help you keep within the 18% of businesses that survive each year.
I have a few resource points that will help you look at business sustainability;
I have also developed the Craft Biz Incubator to help you with subjects just like this.
One of the main attractions of this membership is the 12-month course, called ‘Fearless Year of Growth’ which is the exact system I use to grow effectively every year. We will be covering all sorts of things, including finances!
Thank you for watching! I hope that was helpful?
If you have any questions or comments, please pop them in the comment section below.