Rena Tom: Making Sense of Your Business Finances

After a few weeks of guest posting, we are thrilled to have Rena Tom join us as an official contributor here on Poppytalk.  Rena will be answering business questions from makers every other Monday.  If you have a question for Rena, please feel free to leave a comment.  Be sure to check out her site where she offers up business advice including great interviews and more here. Here's her latest post:

Contributor post by Rena Tom

My biggest challenge is ... financial organization. I find that very scary and more difficult the bigger and more successful I become. What if I want an employee? How will I pay taxes?

- Sarah of Dodeline Design, commenting on a previous post

No matter how much we do what we love for the best of reasons, in order to elevate it from hobby to business we must keep an eye on the bottom line. Dealing with money issues is almost always scary, however - so much depends on forecasting and what-ifs over which we may have very little control. To address your questions, I’ve brought in an expert on the topic of finances and your small business.

Lauren Thorp of Stamp 48 is a financial consultant who focuses on helping you achieve your financial goals, so you can focus on your creative passion. She has previously worked with micro-enterprises and community groups to increase the chances of sustainability of their businesses, and has also been a financial analyst, spending her days developing forecasts and budgets in Excel. She recently quit her full-time job to pursue her passion of helping creative business owners grow their businesses.

I asked Lauren some common questions asked both by those starting out and those ready to grow big. Read on!

Q: What are some financial challenges particular to a handmade business?

A: One of the biggest financial challenges that handmade producers face is that of scale.  As a small business owner, you don't have access to some things that the larger companies have access to: funding and credit. While it's not impossible to obtain, it's definitely challenging. Most handmade businesses are forced to bootstrap their operations. However, crowdfunding sites like Kickstarter can help small producers fund their work before production, which allows them to raise enough cash to produce a new line of products.

Q: What must small business owners have in order to keep a clear picture of their finances?

A: A strong record-keeping system is a must. Make sure you have a place where you store your receipts and invoices. This can either be paper files or electronic files, but I'm partial to electronic. Raise your hand if you're terrible at organization. Oh, I see you back in the back. It's okay, Shoeboxed is a great service that can help you keep your files together. You get prepaid envelopes a la Netflix to stuff with your crumpled-up receipts and business cards. Send it in to Shoeboxed and they scan it and upload it for you. You can retrieve your data in a wide variety of formats to do with it at you please. Staying organized is the key to staying on top of the financial health of your business.

If you don't want to hire a bookkeeper for your business, you can DIY by signing up for an online bookkeeping service to keep your finances in check. I've heard great things about Outright (free for 30 days, then $10/month). Outright, and services like it, are well worth the minimal investment, and simpler than traditional bookkeeping software. It will even calculate your estimated quarterly tax payments.

Q. Let's talk about pricing. How do I know I'm charging the right amount from a business standpoint?

A: Let's tackle this question in two parts: theoretical and practical.  A price says a lot about your product. It communicates to your customers the value of your product. If you have a higher-priced item than the market average (and your quality matches), customers will tend to see your product as a luxury item. That can be a great marketing technique.

On the flip side, many handmade producers try to compete with Big Box prices thinking that if they are competitive on price, more buyers will be attracted to them. However, this doesn't tend to be sustainable over the long haul due to a fancy economic term called "economies of scale" (hey, wait! please don't stop reading, I promise I won't bring up any more nightmares from your high school Econ class!) Economies of scale simply means that as the quantities of the items that are produced increase, the cost to produce the item decreases. Even simpler, the more you make, the less it costs. And that's how Big Box stores have their super low prices. As you know, you're not a Big Box and you only make a limited number of items as a small/handmade business; thus, you have to charge a higher price to stay in business.

By lowering your prices to try to compete with mass producers, you are doing yourself and the handmade industry a disservice. Big Boxes should compete with other Big Boxes on price, and handmade producers should compete with other handmade producers on price. The two markets (Big Box and handmade) are separate from each other. People who shop for handmade products do so because it's better for people and the environment. The entire handmade seller community needs to get on board with this idea in order for this to be viable.

Still with me?

On to actually pricing your items. The basic formula to find your wholesale price is (your hourly rate x number of hours to produce + cost of the materials). Your retail price is then two times your wholesale price. [Note from Rena: there are several pricing formulas but this is a good starting place.]

For a bit more detail and a downloadable Excel calculator, check out this post I wrote last year. Even if you don't currently do wholesale, you may want to someday, so charge all of your direct customers the retail price and not the wholesale price. If your retail price seems unrealistically high, check out this post from Lauren Venell on Craftzine about the top-down pricing approach.

Q. How much money do I need to save, and why?

A. While it might be tempting to take the cash from that new bulk order that you just received and go buy yourself a pretty little something (you worked hard, gosh darn it! you deserve it!) resist the temptation. In order to grow your business, you will need more and more cash to fund your expansion. Do you dream of creating a higher end line of products? Remember that you will have to invest in higher quality raw materials. Or maybe you want to hire a shop assistant, which will make your life 200% easier. Unfortunately, your shop assistant won't work for free. Set aside as much money as you bring in that you can. I know "as much as possible" doesn't really answer the question "how much", but seriously. As. Much. As. Possible.

Also, don't forget to save up for your quarterly tax payments. As an independent business owner, governments usually want to collect from you each quarter. Hopefully this isn't the first time you've heard about this. If it is, find a CPA for yourself pronto.


Rena Tom is a retail strategist for creative business owners. She previously owned Rare Device, a boutique and art gallery with locations in New York and San Francisco that was renowned for its carefully edited collection of design objects, books, housewares and accessories, and for supporting small, innovative designers and artists whose work was not easily found in stores. Rena blogs about personal projects as well as retail trends and small business tips at She lives in San Francisco with her husband and baby boy in an apartment filled with too many laptops, Sprecher root beer, half-finished craft projects and overdue library books.

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