I originally wrote these rants with arts and crafts professionals in mind. This was a period when I was educating these folks on how to run their studios as the small businesses they in fact are. Bear that in mind as you read about craft widgets and retail shows. The principles, however, are the same as with any small business, and apply whether dealing with the manufacture of art or industrial widgets or service businesses selling time and expertise instead of goods. These are practical tools to help any businessperson manage a business better.
If you are a typical crafts professional, then you work on a margin/gross profit/contribution rate of about fifty per cent. The first point you need to appreciate is that this is the same spread your gallery owners get when they double your price (it’s called keystoning). Yes, folks, it really is a level-playing field: we all have overheads, we all pay taxes and we all have to eat.
Every craftsperson depends on a wide range of suppliers to obtain the necessary materials and supplies to produce the work. Some are more important than others, and likewise, materials are more important in some craft media than others. A jeweler specializing in gold and diamond rings places more emphasis on her supplier relationships than, say, a potter. It’s just common sense: (a)diamonds cost more than mud, and (2) the diamond as-purchased is an integral component of the finished piece, while that one-of-a-kind vessel bears little resemblance to the mud it started as.
Susie produces a line of fashion jewelry. She keeps separate books on her craft business, and has a good handle on her cash flow. Right now most of her sales are on the West Coast, and a sales rep generates them for her.
Judy has a nice little craft studio making one-of-a-kind recycled pins and beaded baskets. She started her business working part-time in 1989. From modest beginnings she has grown her business to the point where she is now a full time craftsperson. She sells her work at several local retail shows, and this past winter exhibited at the Philadelphia Buyers Market of American Craft. This wholesale show was so successful that she’s booked for the balance of this year, and even has orders for 2002 on the books.
The price you decide to charge is but one aspect of the pricing equation, and not necessarily the most important one to your customer. The buying decision is based on the overall package presented to the customer, of which price is just one component. Many buyers will pay a higher price in return for other tangible or intangible benefits associated with either the product or the seller. You can use these other dimensions of pricing to good advantage if you understand how your prospective customer perceives them.
We’d all make a lot of money if we didn’t have to pay our employees, wouldn’t we? Here’s a short quiz. Employees are:
a) trustworthy, loyal, conscientious, dedicated, motivated etc., or
b) lazy, worthless, good-for-nothing, thieving, conniving, shiftless etc.
Depreciation, and its cousin amortization, are fairly obscure accounting terms. The most immediate and practical application they have to a craftsperson is as a deduction against earnings to arrive at income for tax purposes. Straight line, double declining balance, MACRS and ACRES methodologies are best left in the hands of the accountants. But what are they? Depreciation refers to charges against physical assets, while amortization refers to intangibles, such as computer software. For our present purposes, I’ll speak only of depreciation, and then only in the economic sense, rather than the esoterics of tax methodologies. Let’s assume a potter buys a new kiln costing $1,000, and further that this piece of equipment has an economic life of, say, five years, after which it’s consigned to the scrap heap. Depreciation spreads the cost over the useful life of the asset, rather than charging it off entirely in the period the cost was incurred. A high priced item having a long life is capitalized instead of being expensed in the current period.
Corporate credit managers have an old saying to the effect that it’s not really a sale until you put the money in the bank. There is some truth in that. Lots of things can happen to that shipment while the receivable is still outstanding. The customer can refuse to pay for a variety of reasons — say, a dispute over the quality of your craft widgets or the specific patterns ordered. Or maybe there’s no money to pay you with, after taking that buying trip to Tahiti. A death in the family, or a check that’s truly in the mail, but lost. The list is endless. Suffice it to say that all businesses need a good handle on their policies and procedures here. What good does it do you to ask for COD on the initial order, and then ship reorders on open account? That doesn’t tell you anything. What will give you a good feel for this customer’s payment habits is to ask for several references from other makers in the crafts industry — and then actually take the time to check out those references. Or invest in a membership in a credit reporting service, such as the Manufacturers’ Credit Cooperative.
More home businesses get in trouble with the Internal Revenue Service for miss-classifying their workers than for any other reason. Typically the outside help works in the studio on a full- or part-time basis using the business owner’s tools and equipment, and is paid an hourly wage with no deductions taken. When the IRS discovers this (and they will find out!) the so-called contract worker is reclassified as an employee, federal employment taxes are imputed (social security, Medicare and unemployment), interest and penalties are accessed, and the business owner discovers that the effective rate being paid the newly-promoted employee is double what he thought.
A balance sheet is a static picture of a business at a point in time. It describes what the business owns and who owns it. A business has assets such as cash, accounts receivable, inventories and equipment (fixed assets). At the same time a business owes money to vendors, banks, taxing authorities etc. Whatever’s left over is the owner’s stake in the business, called equity. An income statement depicts the revenue and expense activity for the business over a given period of time: monthly, quarterly, annually. It reflects how profitable the company is. These are the two classic financial statements. Neither one gives you a complete snapshot as to where the money came from or where it went. Cash flow statements are a bridge between the balance sheet and the income statement. They explain those changes in cash positions which are so important to the entrepreneur, but which are not emphasized using typical accounting techniques.
As if there aren’t enough figures dancing around the left side of your brain, here’s another concept that you need to have a grasp on if you want to stay on top of your business. It’s not enough to make profit; you also have to manage your working capital. (more…)
Separating the Amateurs from the Professionals. Nothing is more difficult, for both newcomers and old hands alike, than pricing. (more…)
