At 5 o’clock we all began packing our work up. It had been a cold day in the park and I was mighty happy to be on my way home. My lovely neighbour (a potter) and I were chatting away and I asked her how her show had been.
“Great” she said, “I doubled my booth cost! I made $250!”
Whoa! No, that’s not great.
Can you see her mistake here?
She has neglected to account for her COGS – Cost of Goods Sold.
Even though we love what we do, if we are selling our work (even if you are only selling 2 pieces a month) we are running a business. And even though we love what we do and we all have different financial goals, the first goal of a business is TO MAKE A PROFIT. Maybe your goal is simply to cover the cost of your hobby, maybe your goal is to make enough money to take some classes, your goal is definitely to at least break even.
Today we’re not going into how to price your work, that’s a whole different story. Today we’re going to talk about keeping track of how much you paid to make that work. Paid? Yes, paid. You paid actual money to make each and every piece of work you have in stock. Supplies aren’t free. You spent time to make that work, that is an expense. I know you love making it however your time is valuable. Imagine if instead of spending 3 hours making work you spent 3 hours making lattes at the local cafe. You’d have money in your hand. Your time counts for something.
Profit is defined as income minus expenses. What you made less what you paid. Your goal is running your microbusiness is to make profit.
Back to my potter neighbour. Let’s say she sold 20 mugs at $25 each. Her GROSS profit is $500. She has assumed that because her booth cost was $250 that she has made $250. She has assumed that her NET profit is GROSS profit minus her booth costs. She has neglected her COGS.
GROSS profit is the total amount you have made. NET profit is GROSS profit minus all expenses
She knows that the clay for each mug costs $3. She makes 4 mugs an hour. She wants to make $20/hour, each mug takes 15 minutes, so each mug costs $5 for her time. When she sells a mug she packages it in a box with a sticker, total cost of $1.
Note that this is a very simplified version and doesn’t take into account items like studio costs and other expenses
This means that each mug has a COGS of $9, $3 for raw materials, $1 for packaging and $5 for labour.
$500 (GROSS PROFIT)
-$250 (booth cost)
= $70 (NET PROFIT)
On the weekend if she has sold 20 mugs she has spent $180 to make those mugs.
Her NET profit is $70.
Oh, that’s a different story. Failure to track your true costs and profit is what leads to people not understanding why they aren’t making any money.
In order for you to be on your way to profitability you have to price your work properly. The first set to that is to know your COGS. Go ahead, pick up a piece of your work. Do you know exactly how much it cost you to make it?