Being a craftsperson and starting a craft business means having the opportunity to utilize all your wonderful talents. It means making money from your creative gifts and experiencing the joy of knowing people truly appreciate your art. In short, running a craft business is one of the most soul-satisfying occupations imaginable.
But, (and you knew there would be a "but" in there somewhere, didn't you?) it also means donning a few extra hats you may not previously have worn. A craft business is just that: half craft, and half business. Most craftspeople have the crafting side down pat, but far fewer understand the business side of things. Yet, it's the business smarts a craftsperson brings to his art that allows him to make a living from it.
Here are 7 key business administrative functions to think about when transitioning your craft into a business.
It's tough to remember to save those receipts or record that mileage, but you're a businessperson now. Everything you do in relation to your business must be documented. When you purchase wholesale supplies, keep the receipts. When you travel to a craft show to sell your wares, note the mileage and other travel expenses. When you set up a website, track the costs. The more you can prove you are a legitimate business, the less likely the IRS will question your status as a business.
The more you can prove you
are a legitimate business, the less likely the IRS will question your status as a business.
This also means being ethical and above-board about your documentation. It means declaring your income, not hiding it. It also means not justifying personal purchases as "business" expenditures. If you try to claim this week's junk food was a tax-deductible purchase because you needed something to alleviate the stress of being in business, it will bring all your other expenses into question should you be audited.
Documenting your income and expenses does not have to be complicated. While there are lots of software options available, documenting a small craft business by hand is often just as easy. It is advisable to open a separate checking account (perhaps with an attached debit card) solely for business use. Resist the temptation to use this account to buy groceries or pay the babysitter--keep it strictly for legitimate business expenses. This doesn't mean you can't spend the money in that account for non-business-related purposes, but it does mean you should transfer a sum to your personal account and note it as a withdrawal, not an expense.
As for other documentation, if you travel to other states to attend craft shows or other selling venues, you need a state tax number for each state; and then, you have to file paperwork and pay the taxes due within the deadline. In this down economy, many states are clamping down on vendors who don't have a sales tax number. This includes representatives showing up at the event and asking to see your sales tax number. Don't get caught without one.
The crafting world can be a small and intimate place. Your reputation as an artist may be immaculate--but what about your reputation as a businessperson? A solid business reputation means treating your customers right. It means paying your bills in a timely fashion. It means dealing professionally with wholesale suppliers and vendors. It means not becoming known as a complainer at craft shows. It means handling sensitive data, like customer credit card numbers, with discretion and safety. You'll find that within a year or two of being in business, your professional reputation--good or bad--will begin to precede you. When a coordinator at a selling event says, "Oh, I've heard of you...," the words should be in cheerful, happy tones, not gloom and doom.
Once you transition into making your craft professionally, you should embark on a perpetual quest to reduce your costs in both time and money. Rather than buying your raw materials or component parts retail, you should set up wholesale accounts with vendors. You will probably have to purchase a minimum amount, but the cost per unit is far lower.
If you have an inefficient step in the manufacturing process, consider how you can speed up the process without sacrificing quality. This could be as simple as using a lower-grit sanding belt, or as complicated as contracting out certain steps to specialists. It's the nickels and dimes you pinch that may spell the difference between financial success and failure. This is especially true for beginning businesses.
You could make the most beautiful products in the world, but if nobody knows they're for sale, how can they buy them?
Once, the only way to make a product visible to a buying public was to either keep a brick-and-mortar retail establishment (at great expense) or attend selling venues (which takes time). However, in this "connected" age, that's no longer good enough. Nowadays, there is no excuse for not having an online presence. Whether you use a blog, a website, Facebook, Etsy, Twitter, or other networking opportunities, the whole idea is to get the word out about what you make and how people can buy it. Take advantage of marketing opportunities that are low-cost or free. Some blogs and websites cost nothing but your time. Other options include YouTube clips, classes, and even displaying your wares in libraries or banks. That said, never underestimate the power of people being able to see and touch your product, as well as meeting you, the artist.
5. Eliminate Debt
One of the biggest killers of any business is debt. This applies to Fortune-500 companies as well as modest little home craft businesses. Sometimes it's hard to come up with operating capital, but if at all possible, avoid maxing out a credit card or borrowing from a bank. This is money that must be repaid (often with crushing interest) and it puts unnecessary stress on you. A craft business--any business, for that matter--takes time to establish. Your incoming cash flow could be very, very slim as you develop your market and hone your manufacturing. Adding a crushing burden of debt on top is asking for trouble.
To this end, I urge many beginning craft businesses to keep their "day job" for as long as possible before transitioning full-time into craft work. This is advice my husband and I did not follow when we started our business 19 years ago, so I'm trying to spare you the ten years of grinding poverty we experienced as a result.
Nowadays, there is no excuse for not having an online presence. Whether you use a blog, a website, Facebook, Etsy, Twitter, or other networking opportunities, the whole idea is to get the word out about what you make and how people can buy it.
6. Legal Issues
For most small craftspeople, transitioning to a proper business is painless and natural. You just start selling your wares. But at what point should you start worrying about legalities such as writing a business plan, setting up a Limited Liability Company, or putting an attorney on retainer?
Hopefully never! I'm a big advocate of keeping things as simple as possible. But if your business experiences growth, consider it a mixed blessing. Yes, you're earning more money, but your business administration will get more complicated.
Sole proprietorships are the simplest and easiest businesses to conduct. There is little paperwork and you don't have to answer to anyone but your customers. Be advised that you'll have more difficulty borrowing money for startup costs, but I would strongly urge you to examine whether borrowing money for startup costs is wise to begin with--especially in this economy.
Partnerships are more complicated and should be contractually arranged. The advantages of a partnership are obvious: you share the burden of cost, work, and marketing. The disadvantages are also obvious: you may have serious disagreements with the person with whom you're partnered. It is wise to have a legal "out" contractually in place.
To this end, I urge many beginning craft businesses to keep their "day job" for as long as possible before transitioning full-time into craft work.
Incorporating is a more complicated affair and is frankly unnecessary for most small craftspeople. Incorporating provides some personal safeguards since it means your personal effects are relatively safe from legal entanglements. In other words, you won't lose your home if your business is sued. However, it's a complicated and expensive system to set up, often requiring legal assistance and much paperwork. If your intention is to earn a modest living selling crafts, it's unnecessary to imitate the "big boys" when it comes to incorporation.
7. Business Plans
There are those who tell you that you should never dip your toes into the business world without having a business plan written in advance. I don't know what planet these people are from, but this advice seldom applies to small craftspeople.
A business plan is a document which includes an executive summary of your business, an organizational plan, a financial plan (including a statement of financial condition and sources of funds), a profit-and-loss projection, a balance sheet, a cash-flow projection, a management plan, a summary of your business skills and experience, a list of your business associates, an intelligent analysis of your weaknesses, a marketing plan (which identifies your competition, identifies your markets, and determines your market share), all summed up with a table of contents. Have your eyes glazed over yet?
While it could be argued that writing a business plan will hone a novice craft business into a model of tightly-run success, it's also a difficult and intimidating project. And for most small craftspeople, it's entirely unnecessary--with one important exception: If you plan to borrow money for startup costs, the lender may require you to write a business plan first. I strongly feel that borrowing money for a startup craft business is a mistake. But, if you do plan to borrow money, then a business plan will at least force you to put your business skills into black-and-white on paper. By doing so, you may realize one of two things: either (1) your plans are so sharp and air-tight that you're sure to succeed; or (2) there's no possible way your business can make it. If you recognize the latter, then the last thing you want to do is borrow money to fund a doomed venture.
If your intention is to earn a modest living selling crafts, it's unnecessary to imitate the "big boys" when it comes to incorporation.
It's a Business, Not a Hobby
As you can see, starting a craft business is more than just indulging in a glorified hobby. It's a business and should be treated as such. The craft world is littered with talented ex-craftspeople who are back at their day jobs because they ignored the realities of business. Don't be one of them.
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