Hi everyone! We’ve been talking about your business costs, starting with overhead expense, and this week, direct expense (materials and supplies). The timing is perfect to look at and revise your prices, with August winding down as we head into the Fall and holiday retail seasons.
If you make something that you sell, you have direct costs. If you sell vintage, you have direct costs. If you provide a service, you have direct costs. I make handknit accessories, and to do so, I have to buy yarn, perhaps buttons and threads, maybe even beads or other trims. All of which are materials and supplies that I build into the price of each item I sell.
If you sell vintage buttons, you might have bought the original buttons or you might just happen to have them; in the former case, you’ll want to make sure your expense is built into the price and in the latter case, you might want to build in the estimated cost or worth into your price. If I was a web designer, a particular job might involve a special font, software and/or images that I purchased, all of which I would need to be sure to include in my price/invoice for the job.
I can’t pretend to know all the possible direct expenses, materials and supplies that go into all of our businesses – the list is probably infinite! Recently, someone told me that your direct expenses are fixed, meaning you have no control over the cost; however, you do have a great deal of control over this. You can decrease your direct expense (and overhead) to increase your profit; in fact, you should try to do just that!
If you buy your supplies from a store, are you able to buy them on sale? Are you able to negotiate a bulk purchase or other discount from a supplier? You might think that suppliers aren’t interested in deals, but (a) you won’t know if you don’t ask and (b) they need to make money just as much as we do, and they may desperately want to move inventory. I know of sellers who form sort of coops in order to buy supplies wholesale.
And what about making your own supplies? I’m learning to spin my own yarn, for instance! Just be sure that you factor in the cost and time of your handmade supplies into your overall item’s price. You may even decide to sell your handmade supplies!
There are many, many methods for calculating your materials and supplies use. For instance, I weigh a finished scarf, before washing or adding buttons or other trim, then calculate the percentage of yarn used compared to the cost of the purchased yarn.
Example: Scarf = 2.5 oz by weight, weight of one skein of the yarn I used is 4.0 oz, so 2.5 oz divided by 4.0 oz = 0.625 x 100% = 62.5%. That means I used 62.5% of the skein of yarn. If the yarn cost me $25.00 (not unreasonable for many fibers), I multiply the $25.00 by 62.5%, which comes out to $15.63 (rounded up). If I paid shipping for the yarn, I would add that to the price/skein before calculating the cost.
You can calculate by weight (solids), volume (paint, resin, other liquids), length (thread, lace, etc.). You can calculate by number of units (one bead used in a tube of 50 beads), “blue book” value (worth of vintage goods), or any other number of metrics. I recommend you try to be consistent and use a methodology that’s straightforward, easily explained and that doesn’t violate tax codes or other regulations. That last one was a little tongue in cheek, but surviving or avoiding an audit altogether are good goals.
How do you calculate your use of materials, supplies, and other direct expenses? Have you successfully decreased your supply expense via negotiating deals or other methods? What else should business owners think about when they’re accounting for the direct expense of making their object or providing a service?