August 24, 2021 | 7 minute read

Creating a Small Business Budget

Make sure you’re covering expenses and planning for the future with a budget that helps your business grow.

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Knowing exactly how much you’re spending on the supplies and materials that go into your products can help you make sure you're setting the right prices and accounting for your own time and energy. An effective small business budget goes beyond covering just the direct costs that go into producing your item—it’s also essential to address indirect costs that can chip away at your profit margins.

Read on for tips on tracking business costs, evaluating your item prices, and setting goals to help your business grow.

Establish a system for tracking expenses and income

No matter what kind of business you run, it’s important to have an accurate understanding of your shop’s financial health. Keeping track of your expenses helps you make more informed decisions—and helps you avoid surprises like an unexpectedly large tax bill or unnecessary debt.

Whether you use accounting software or more old school methods, knowing how much money is coming in and going out is the first step toward better bookkeeping. Read Tips for Tracking Your Business Expenses for more information about getting started.

Assess your approach to pricing

As a creative business owner, the prices you set for your products are pivotal in establishing a steady, sustainable income stream for your business. But finding the elusive pricing sweet spot isn't easy. To help, here are two complementary approaches. Select one of your items to work with and get ready for some number crunching! This exercise is all about trial and error.

To get started, open this Google Drive worksheet. Then, create a copy of the worksheet for yourself and follow along from top to bottom.

The top-down approach

Using this approach, you’ll use the cost of the materials, time, labor and overhead expenses to determine the price of your item. Start with numbers that reflect what you currently spend. Then, consider what you might change to improve your bottom line.

1. Start with your materials. Make note of the materials you use to make each item and how much you spend on them per item. If you sell vintage items or craft supplies, note the cost of the item when you purchased it.

If you offer free shipping, that cost can also be considered as a by-item material expense, or more broadly within your overhead costs. If you set up a free shipping guarantee in your shop, you can choose to adjust the prices of your items to recover shipping costs using our smart pricing tool. Remember, how you determine and set prices for your shop is your decision.

Experiment: Eliminate one material to see how that changes your costs. Then, see what happens when you decrease the individual costs of your materials. If you could purchase supplies in bulk or through a wholesale account, how would that affect costs?

2. Account for overhead. Make a list of any business expenses that are not tied to a specific item. For example, you may rent studio space, purchase equipment or buy gas to drive to the supply store. Consider other expenses associated with running your business, including marketing costs, like Etsy Ads or paid social media promotion.

You may also factor in applicable taxes and Etsy fees. Document all of these costs, then divide them by the number of items you have or plan to produce this year. That will give you an estimated overhead cost per item.

Experiment: Change the number of items produced per year or eliminate an overhead expenditure you could do without.

3. Cover your labor. It takes time to produce, package and ship your items. Consider your production process task by task. All in all, how many hours does it take to prepare this product for sale? What should you pay yourself for all that you do? That's the approach favored by Hana Brewster, owner of Quiet Clementine, an Etsy shop that sells personalized home goods and celebratory items. Brewster, who creates her products in her home in Little Rock, Arkansas, suggests figuring out how much you would make at a normal day job. Keep in mind that you may be the only one doing every task involved with running your business, including production, packaging, shipping, editing photos, and answering emails. "Just because you have fun with your business doesn’t mean that you shouldn’t pay yourself fairly,” Hana says.

Experiment: Eliminate a task or decrease the amount of time one step in your processes might take. Try different hourly wages. Can you make your processes more efficient by coupling similar tasks? Should you pay yourself more?

4. Make a pricing goal. If your business is just getting off the ground, breaking even might feel like a great place to start. Or, maybe you’ve been in business for a while and you're re-evaluating your pricing structure. Think about your shop’s scope and where you’d like to be by the end of the year. It’s helpful to price for the future, not just the present.

The bottom-up approach

You now have a good picture of what you’re currently spending. But does this mean your target customer would be willing to pay that amount, or that your pricing properly accounts for the value of your item? Not necessarily, which brings us to a second method of calculating price. In the bottom-up approach, you’ll use research and testing to determine a price you think is right and then figure out how much you’d ideally spend on each part of the process so that you reach this pricing goal. Follow these three steps to figure out an ideal price:

1. Do research. Consider where your prices exist in the wider ecosystem of items available on Etsy and online. How do your prices compare? Remember, items from a big box store don’t have the added value of a personally handled, one-of-a-kind piece. Their prices can provide a point of reference, but these retailers aren’t your direct competitors.

2. Determine your target audience. Get a clear picture of the type of folks who buy your items and what occasion they're purchasing for. For example, Olivier Gratton-Gagnė, who sells detailed map prints in his Montréal-based shop iLikeMaps, knows that his maps are often used as gifts for family members and friends. "In that context," he says, "I don’t hesitate to ask for $20 to $135 for a print that costs much less in materials, because those prices make sense for a thoughtful gift for someone you love.”

3. Test and gauge response. Once you land on a price that you think makes sense, seek unbiased feedback from fellow business owners and shoppers. Ask questions and take cues from in-person shows. You can also set varying prices for similar items in your shop to see how well they sell—a process known as an A/B test.

Meeting in the middle

Using both of these approaches, it’s very possible that your actual and ideal prices will look quite different. That’s totally okay – this is your chance to figure out why! Use the information you've gathered to determine the right levers to pull and make adjustments to your business. Do you need to use less expensive or fewer raw materials? Do you have to increase your efficiency or cut out tasks? Are certain details not worth your time because they’re too labor intensive? Remember, your prices are a continuous work in progress. Whenever something changes in your shop or the greater business ecosystem, it’s important to re-evaluate your approach.

Forecast your potential growth

Once you have a clear idea of how much money is coming in and going out, you can use forecasting to plan for the future. Forecasting is an educated guess, based on previous business performance, of how your business will do in the future. Find out how in this article.

Return to the Ultimate Guide to Starting an Etsy Shop

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