Why Handmade Businesses Struggle With Profitability
I've worked with a number of handmade businesses, and I commonly hear business owners referring to their revenue when talking about their finances. While it is important to sell your products, and earn revenue, it is equally important to track your expenses to calculate your profit. Profitability is a more useful metric when measuring the success of any business, and in this article I am going to talk more about why.
My Background With Handmade Businesses
I personally work with a brand that produces handmade candles. One of the biggest issues I see is how common it is for these businesses to take on expenses without tracking them. This is incredibly important, because tracking your expenses is how you know if your business is profitable, how you pay the correct amount of taxes, and how you actually understand how much money is going out versus coming in.
The Ceramic Mug Seller: A Cautionary Tale
Let me use an example from another business I've worked with, one that sells ceramic mugs on Etsy. They were extremely excited to sell out their first batch, because of course, you want your products to sell.
But when they finally did the math and consolidated all of their expenses, they realized they had spent $340 on materials and studio rentals, not even including their own time. That's something you should include in your production costs, but a lot of new business owners, especially in handmade industries, don't consider their own time as an expense.
Even without factoring in their time, just the materials and studio rental costs alone came to $340. Their sales after selling their entire batch were only $310. They were losing money while still feeling extremely successful.
A big part of this problem comes down to how people price their products. Often, pricing is based on what a consumer would be willing to buy, rather than what it actually costs to make the product. You need to consider both: what you're spending and what your consumer is willing to pay.
Why Handmade Businesses Really Fail
The main reason a handmade business isn't sustainable usually isn't because they can't sell their product or don't get their name out there enough. A big part of it is that even when they do sell their products, they don't have the profitability, because they don't have a clear picture of their finances.
Going back to the ceramic mug seller: she tracked her materials and studio costs, but not her own time, and not the smaller expenses that add up, like mileage from driving to the studio. Those costs still cut into your profits, your sales, and your revenue, and they need to be accounted for.
Revenue vs. Profit: They Are Not the Same Thing
I often hear handmade business owners say, "If I'm selling out, I must be profitable." But that isn't always true, because revenue and profit are completely different concepts. You can generate a large amount of revenue and still not make any profit.
A good example right now is AI companies. Many generate massive amounts of revenue but aren't profitable. When they do the math at the end of the year, they're still losing money overall. Understanding the distinction between revenue and profit is essential; they are not the same thing.
Numbers vs. Creativity: Both Are Learnable Skills
I want to touch on something else I think is important. Personally, I'm not a creative person. I have a hard time with visuals, and I struggle to come up with new creative ideas. I'm good with numbers, which is why I became an accountant.
I believe the reverse is often true as well. Creative people tend to avoid numbers because it's just not their thing, and that's completely understandable. I avoid drawing, painting, and making creative decisions, because I know I'd feel intimidated and probably wouldn't do as good a job as someone more naturally creative. So I outsource that kind of work to people whose specialty it is, just like I do with a lot of my marketing and visuals.
That said, financial literacy is also a learnable skill. As a business owner, you want at least a working concept of your financials. You don't want to outsource it entirely and have no idea what's happening in your own business.
A lack of numbers or analytical thinking is a skill gap, not a personality trait. In the same way, I could probably learn visual design and how to make things look visually appealing. It's not something I've done, but it's a skill I could develop, not an inherent trait the way creativity or analytical thinking might be. Tracking your finances is a skill, just like visual design is a skill.
A Simple Example: The Jar Candle Maker
Let's go back to the candle company I work with. Say a jar candle maker sold 200 candles in December and earned $4,000 in revenue.
After doing the math, factoring in wax, jars, wicks, fragrance oils, seller fees, and craft show costs, she actually only earned $380 in profit. And honestly, that's extremely good. In the early stages of any company, profitability is going to be slim to none, so earning $380 in profit is an achievement.
So if you were the seller, which number matters more: the $4,000 in revenue or the $380 in profit? Personally, I'd say the $380 in profit is far more important, because that's the money you're actually earning from the company, not just inflow in revenue.
I completely understand that many creative individuals don't want to work with numbers or track their finances as precisely as I do. But just as I should have a concept of my own brand, you should have a concept of the financials behind your business.
An Action Step to Get Started
Here's a small, actionable step you can take right now to help you get on track with your finances.
Pull the last three months of your Etsy sales data (or your general sales data, if you don't sell on Etsy).
If you're on Etsy, here's how to find it:
Go to your Shop Manager
Click on Finances
Go to Payment Account
This will show you your sales data.
Having this actual data will help you follow along, because you'll be working with your own real numbers. I'd recommend using a spreadsheet, since it's a living document, meaning any changes or edits you make will reflect throughout the rest of your sheet. A notebook or any other system works too. I'd call this your money journal.
Once you've pulled your sales data and started your money journal, you'll have a much easier time putting these concepts into practice.
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