Learning how to figure out your supply costs can be confusing for both new and seasoned craftpreneurs. This post breaks down the factors that you need to consider when determining your cost of goods.
Hey, y’all! I don’t know about you but I get asked all the time about how to run a successful business. In fact, so many people ask me about it that I now have a business coaching group for those serious about running a thriving, profitable business.
There are a lot of components involved with running a successful business. I’m on a mission to help others find success as craftpreneurs so they can escape the daily grind and spend every day doing what they love.
With that in mind, I’ve talked before about how to price your wreaths for profit. The response to that post was so amazing that I thought I should cover more information around this general topic. Today, I’m doing a deep dive into determining the cost of goods sold in order to calculate how to price your handmade items.
After all, figuring out how to price your items is difficult. At the same time, it’s incredibly important to get it right. This one decision will determine if you have a successful business or a dying one. No one wants a dying business.
On the one hand, you don’t want to price your incredible product so high that people decide to buy something similar from someone else instead. On the other hand, you need to price them high enough to cover your costs and make a profit.
What’s a craftpreneur to do?
What It Takes To Be A Business Owner
It’s time for a little tough love. When it comes to running a business and talking about making profits, you need to STOP thinking like a hobby crafter and START thinking like the craftpreneur that you are.
These are two very different mindsets and it’s vital to your success that you can get yourself into that craftpreneur mindset.
To help you with this, I am going to share with you how to calculate the cost of your craft supplies today. I want to help you make the most profit you can from your product!
If you aren’t able to figure out how much you spend on your craft supplies, you’ll never be able to price your wreaths appropriately nor will you be able to determine how and where to cut costs if you want to maximize profits.
Are you ready for today’s business lesson? Let’s dive right in!
What Is The Cost Of Goods?
Today’s post is all about the cost of goods sold. If you don’t have a business degree or are fairly new at running your business, you may not be very familiar with this term.
But it’s time to get familiar – really familiar – with it.
The cost of goods sold (COGS) is the actual cost you incur to physically produce your product. This includes the:
- supplies you used to create your wreaths
- amount of money you spent on them
- costs for things like labor to produce your item
- expenses for things like your warehouse or shop lease, utilities, etc
- shipping expenses
Why is it so important to know the cost of goods sold? Easy explanation: COGS is one of the most important indicators of profitability and the sustainability of your business!
How To Calculate The Cost Of Goods Sold
Ok, hear me out on this one for a moment because it might seem confusing.
With certain types of businesses, it can be difficult to calculate your supply costs on an individual project basis. It really depends on what kind of product it is and the way it is produced (whether it’s made individually or if it’s mass-produced).
For anyone who makes each item individually by hand, this may be an issue as each product may take different amounts of time to create.
If this is the case for you, here’s a general way to figure out your COGS for a time period (NOT per project):
Cost Of Goods Formula For A Time Period
This method simplifies the general process of determining the cost of goods sold when it’s hard to determine those costs on a smaller scale. Follow these step-by-step instructions to calculate your supply costs for a specific time period (month, quarter, etc.):
- A = How much did raw materials cost during this period of time?
- B = How much did labor cost to produce the product(s) for this period of time?
- C = Costs for shipping and inventory
- D = Production facility expenses (or use a %)
- E = Overhead (customer service, etc.)
- F = TOTAL: Add figures for A – E
- G = Calculate the number of units sold for this time period.
- H = Divide your previously figured total (F) by the number of units sold (G) to calculate your cost of goods sold figure.
See how that formula works best when trying to calculate time? If you are figuring out your profits for the quarter, this formula will become your new best friend.
Cost Of Goods Per Project
However, generally speaking, a wreath-making business is one of the easier types of business to calculate the cost of supplies per individual project. Other similar businesses would also use this method over the time method above.
What you buy goes right into your projects, right?
That means you can figure out your cost of supplies for each wreath project by figuring out your raw material costs and factoring in other costs directly related to producing your product.
Figuring out these costs can be hard for beginning wreath-makers because it is hard to get a grasp on what your total expenses will be. Especially, when you factor in expenses such as training classes, shipping supplies, website costs, etc.
How do you break that down into the cost of a wreath?
That’s why it may make sense if you choose to price your wreaths on an individual basis as opposed to, say, using an average price for a period of time.
Note: you can use the COGS time period formula to figure out all your expenses above and beyond your raw materials.
Then, use that number as an average for overhead expenses that you calculate into your total cost of supplies.
How Do You Use Your Cost Of Goods To Price Your Wreath?
Once you know your total supply costs, you can use those figures to determine the price for your wreath.
There are two widely accepted formulas for calculating the price – and both of these formulas need your cost of supplies numbers.
Learn more about these formulas and how to price your wreaths for profit!
How Can You Reduce Your Supply Costs?
As you walk through these calculations, you may determine that you’ve been underpricing your wreaths (which is SUPER common for beginner wreath-makers).
If that’s the case, it’s worth taking a look to see if you can reduce your overall cost of goods to boost profitability. Although likely one of your largest expenses, supply costs is a good place to start working on reducing costs.
Search for ways to purchase your supplies on sale or at wholesale prices so you reduce your costs by buying in bulk. This simple adjustment can have a huge impact on your total cost of goods, and by extension, on your profitability.
While the business side of wreath-making may not come easily for some Craftpreneurs at first, a little practice is all you need to become adept at figuring your cost of goods. I hope this guide helps make the process easier for you until it becomes comfortable!
More Helpful Business Tips
- Business Budget Template 101: Creating Your Small Business Budget
- 5 Sanity Saving Shipping Tips for Small Business
- 4 Ways to Build an Email List and Help Your Craft Business
- Great Product Photography Tips For Selling On Etsy
Ask Your Questions In Our Facebook Group
If you have any questions about this process, please leave a comment below or post your comment in our How To Make Wreaths Facebook Group.
Chances are that if YOU have a question, someone else will have it too and benefit from being able to see the answer.
We’d love to hear your ideas or feedback! If you need more help pricing your wreaths we have a full detailed lesson all about pricing in our Business Coaching Group.
If you are interested in more info on learning how to sell wreaths, how to make wreaths, where to buy supplies, and being in a community of like-minded crafters, check out our Creative Coaching Subscription Group.