Making a Profit

You don't have to be a corporate executive to be familiar with business terms and concepts. Since you are the business owner, you'd better learn to dance double-time to the same tunes as corporate America, to make sure you are making a profit, - and if you are not, - why!

Profit: Lets define this term carefully, since so many people misuse it. Before we discuss profit lets look at a few other concepts, -and work our way towards our elusive goal.

Gross sales: If you pay $100 for a show, and you sell $1,000 worth of product, - in my book you have just had an excellent show, (ten times the show fee.) For most hand-crafted products, shows that yield ten times the space fee are becoming rarer than one-eyed jacks. Gross sales was in this case, $1000.00.

Net sales: If you have returns, that money is deducted from your gross sales. From $1000 in gross sales, deduct $100 in returns, your net sales figure is $900.

Business expenses: These are expenses that occur as part of your business. These include mileage/and or actual car expenses, show fees, postage, licenses, insurance, cost of supplies, tools and equipment, office supplies, copying/printing costs, stationery, electric, phone bills, labor costs, dues for professional organizations, etc.

Equipment usually refers to capital assets such as furniture or expensive tools, (sewing machine, serger, kiln, computer, acetylene torch, radial arm saw, etc. ) Capital assets can be expensed -that is taken as an expense all in one year (up to a limit of $18,500 of the cost, for assets put into service in 1998*; it should be a bit higher for tax year 1999. Capital assets can also be depreciated , depending on the type of asset, on a 5, 7 or 10 year depreciation table.* My philosophy is "Expense it and take the deduction up front before they change the tax rules" but it depends on your circumstances. This is a question for your tax advisor, when he looks at the whole picture of this year's income and expenses and your projection of the coming year's income and expenses.

Supplies: The easiest way to think about supplies is that they get used up over a period of time. You buy supplies: 3 bolts of fabric, $100 of postage, a box of envelopes, 25 pcs. of 8 gauge silver wire or a box of nails. As you create product or take care of business (mailing checks, writing letters, etc.) these get used up. Supplies are expensed (taken as an expense in the year in which they are purchased.)

Overhead: This includes ongoing business-related expenses, such as insurance, phone bills, utilities, advertising, rent (if applicable) etc. This is an important cost of doing business, and needs to be factored into your profit formula. The easiest way to do this may be to break down a year's worth of these expenses into a monthly number, and allocate a portion of this amount to each show.

Insurance and phone bills roll on whether or not you have a show or other income that month. These are ongoing expenses. If you do only six shows a year, your overhead may be two months' expenses per show, plus your show fees, etc.

You have no tax-deductible labor costs, but your time is worth money and must be factored in, even if the IRS won't let you deduct it as an expense. What that means is: your cost of product (goods) sold must include an hourly wage for your time, - somewhere, -somehow. (After all, if you were working for MacDonald's or IBM, you would be paid for your time, - - right?) As business-owner, your paycheck is what is left over at the end of the year.

Gross profit is computed from sales, less returns, less expenses, less overhead (see above). What is left is payment for your labor, and is taxed as income. When you factor in your labor, what is left after paying yourself an hourly wage, (if anything) is your net profit. That's the bottom line: was it worth working all those hours? What's your time worth? After getting paid for your time, if there's anything left over, you can truly call it 'profit.'

Look at it this way: if your net is $10,000, you need to know how many hours you spent in production, setup, breakdown, design time, purchasing, marketing, etc. - or you will never know your hourly wage. If you think you're worth $15 an hour, and you've turned $22 an hour, you have a real profit of $7 an hour because you could have gotten $15 an hour working for someone else.) If you come up with $3 an hour,- this is not profit: this is slavery.

Track your time in each process; set up a calendar in your workspace and write down start and end-times for daily production; track your time on the road as well as mileage** . The numbers you find as you do this are your' indicators' . It's like drawing a road map. Don't you want to know where you're headed?

If your hourly wage doesn't add up, trim the fat from your processes and find a way of working faster and cheaper. Change your design, your product or your purchasing habits: if you don't buy your materials wholesale, you can't make a profit. As Barbara Brabec says: "Anyone can make money, it's hard to make a profit."

Price structure: How do you price your product, by guess and by gosh? Beginners usually underprice their product. Based on a time-and-materials study, are you selling your product too cheaply?

I've heard lots of rules-of-thumb formulas for pricing, but they won't work for everyone, so what good are they? The only good formula is one which will work across the board, - and will work for almost everyone. Which would you choose from these lame formulas: . Price equals: twice the cost of materials, - four times the cost of materials, ten times the cost of materials, etc.. (Where's the cost of labor? What's the profit?)

A silversmith can take $2 in sheet silver, and 50 cents in silver wire, and spend 2 hours on a piece. Using the formulas above, should he sell it for $5? $10? $25? How about $40 or more, depending on his overhead?

Figure time, materials, overhead, and 10-15% additional to allow for a profit. You will never know if you are making a profit if you don't walk the walk.

** Mileage is tax deductible, - but you have to document it! Where did you go? How far did you travel? For what purpose? etc.

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