If you are someone who is just starting out their handmade business or have been running it from sometime, make sure you read this article. Costing is one of the most crucial aspects for any business because if you don’t get your costs right it can hugely affect your pricing strategy and other finances as well. So make sure you are not doing these costing mistakes in your craft business.
I have discussed about the cost mistakes that people usually make, in detail in one of my videos as well. I share about how these costing mistakes can affect your business as well. So, if you are someone who likes to watch, listen and learn then do check the below video. But, if you are an avid reader then keep on reading this article.
1. You forget to record your costs
This is one of the most common mistakes that people having handmade businesses make. This is more common among the businesses who are just starting out or are working from home. Initially an individual is busy in so many different aspects of a business that they tend to forget about accounting for their costs. Also, when an individual is running a small scale business from home and work on custom orders, they tend to buy raw materials only when an order comes. This makes them feel that they will anyhow recover their costs.
But this can be a risky thing for you. Even if you are a small business, you must record for all your costs. It will give you two benefits:
- First, it will help you in being up to date with all the investment you’ve made since day 1 in your business.
- Second, you will develop an habit of accounting from the very beginning.
Both these aspects will help you in the long run and help you in understanding the finances of your business from the very beginning.
2. You don’t account per unit cost
If you are someone like me who buys their raw materials as complete bundles but use the contents of the bundle one at a time, then this point is very important for you. Whenever you are accounting costs for such bundles that you know you’ll not use in one go, make sure you are accounting for the per unit cost not of the bundle but the quantity that the bundle holds.
Let’s break this thing down with an easy example. Let’s say I buy a paper pack and it costs me Rs 250 and it has 50 sheets in it. I know that I’ll not be using the whole paper pack in one go. So, instead of accounting for unit quantity as 1, I will account it as 50.
This is an important thing to consider because it will help you in getting the right costing of the products that you are making easily. If you are accounting cost for a bundle, it will make calculations difficult in the long run.
3. You ignore the logistics cost involved in procurement
Whenever you buy your raw materials, most of the times you incur some additional costs in the form of logistics costs. These additional costs are basically the cost you incur to get your raw materials, for example, delivery cost, gas charges etc. It is a common tendency that people forget to add these costs in their cost sheets. But, make sure you are adding these costs to your product cost.
In the short run, these costs might seem very small and okay to ignore. But when these costs accumulate in the long run it can cost you a lot. Also, adding the logistics costs in the total product cost will give you more accuracy in finding the final product cost. If we look at the example discussed in the above point, and say that we incurred Rs 50 as delivery charges. Now we need to add this 50 to the paper pack cost which gives us a total of 300. Now, as you can see it also increases the per unit cost by Re 1.
This small amount might not matter to you in the short run but think when these small amounts accumulate over the years. That time you will have no idea about where did all your money go because you never accounted for the logistics. So make sure you don’t ignore these costs.
4. Categorize your products while accounting costs
When you are doing your cost accounting make sure you are categorizing your products in different categories. For my own venture I categorize my products in three categories: raw material, tools and equipment and final product. Categorization helps in two ways:
- It helps in inventory keeping of your products and supplies
- It helps in differentiation of direct and indirect costs
Having a clear differentiation between direct and indirect costs, has a huge impact on pricing. For example, the cost of raw materials incurred to make an individual product are direct costs. Direct costs needs to be recovered fully through the sale of that product. But the cost of any tool or equipment used can be considered as indirect cost. This is because they do not affect one single product directly and can be used for various products. These costs need to be recovered from the sale of various products rather than one single product.
Thus, it is important to categorize your products. But, the way you categorize depends on you and the way your business operates.
5. Mixing up of different costs
A lot of times craft business do not account properly for various types of costs. This is somewhat similar to the above point but it goes beyond the costs incurred on physical products. There are a lot of other costs like promotional costs, maintenance cost, employee salaries, overhead expenses etc. It is very important to have differentiation between all these costs as these costs are not direct costs.
Being indirect costs you cannot recover these costs through all the sales you make in the given time frame. You need to analyze how many units you need to sell at what profits so that you can recover these costs. For example, let’s say you spend Rs 1000 monthly as advertising costs and you make 20 sales on an average in a month. Then you need to divide the whole amount of 1000 among 20 sales and add that to your product cost.
This will automatically affect your pricing, if you don’t do this properly. You might end up making losses in the long run as well. So make sure you are not forgetting about differentiating the costs properly.
These costing mistakes can definitely cost your craft business in the long run. So keep all these things in mind the next time you account for your costs. Don’t make these costing mistakes in your craft business from now on. I would love to know how many of you were making even one of these mistakes and how this article helped you out in the comments below.
Also, do let me know what topics you would like me to cover in my upcoming blog posts.