Thursday, June 24, 2010

"What did you say Alice cost again?"


Money, money, money. Most, if not all of us, really don't enjoy thinking about money. We like to spend it and we sure like what it can buy but the thoughts about money and how to make more of it aren't all that welcome to most people. But when you run a business it is important to not only think about the bottom line but to make it happen. In running a business there are lots of important decisions you will have to make to keep your business healthy. You must bring in more money than you spend and that's pretty much the bottom line. Your business has to stay in the black which means it has to make a profit, at some point, and the sooner the better.

When running a business, it is important to know how to figure costs. The plain and fancy name for that procedure is cost accounting. Cost accounting will help you run your business because it is still the best method known to man so far to help determine costs, profits, and everything else in between. To make good, sound decisions about your business you need to determine how much each product costs to make, the profits it will generate, and the importance of artistic value. Yes, artistic value. You might be able to make a bigger profit on a less beautiful product but, if in the long term, putting a little more into the beauty of it makes you more profit, then figure out how long it would take to return a profit at a little higher price. People are generally willing to pay for quality and beauty. Even if it costs a little more.

Right now I'm trying to determine the cost of Alice. Now I need to figure all the material costs for her right down to the amount of how much pencil got used up and what about that x-acto blade? Pencils are expensive and at some point will need to be replaced. So when you begin to figure out what your product costs, don't leave out anything--no matter how insignificant you think it is. At some point everything will need to be replaced.

To figure out how much each item costs, I'll use the example of the brads that hold Alice together. Take the total cost of the box of brads ($2.99) and divide it by the number of pieces in the box (100) to get the price per brad which is about 3 cents a brad and, if you use 10 brads on Alice that would equal 30 cents. So 30 cents is the total cost for brads that you need to figure into the total cost. Then you just determine how much the other supplies cost and add them together to get the total amount for the supplies. A word about the shipping and handling fee--that gets figured separately and the buyers realize that on Etsy and most other places.

The last part of the equation that I want to discuss with you is what is a fair price to charge for art ability and the hours spent on making the product by you. Artists and craftsmen are talented and can't be expected to work for nothing. Neither can you. So set a fair price for all the effort put forth because that is a really smart thing to do.

Figuring up all of the supplies that it took to make Alice and then adding on a fair price for the artist's work and a fair profit margin is what Alice is worth. Whatever you make, it takes your time and talents as well as raw materials. Don't forget to add those in at a fair price. When all the different aspects of making your product are added up, then you have the cost of your product and can more easily know what you have to charge to cover costs and generate a fair profit.

One last thing: When you begin to make a profit, you will need to begin thinking about long term replacement costs and set aside money for those items that will either depreciate in value, stop working, or become obsolete. In the long term computers have to be replaced, light boxes don't work forever, and rulers break or become unusable. The x-acto knife, scissors, etc. that Megan uses a lot but doesn't use up like brads will get replaced, too, at some point. And that point always comes sooner than you expect if you haven't planned for it. So determining how much of your profits to set aside to put back into the business is always a good idea. Just something for you to think about in your spare time.

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