We’ve been talking about calculating your expenses as part of your product cost. Last week, we started talking about direct costs. In theory, your direct expenses – the materials and supplies used to make your produce or perform your service – are straightforward and easily identified.
Or are they?
Don’t forget “hidden” costs, easily overlooked, like fees charged by your particular venue(s) and Paypal or other online payment and banking systems. Are there sales taxes that you’re not charging your customer outright, but that you’re still liable for?
You might be using vintage or heirloom supplies handed down to you, such as your mother’s button stash or beads from your grandmother’s jewelry. Consider assessing each a “price” based on current value or using another methodology, which will help your prices remain fair, consistent, and (most importantly) ensure some level of profit for you.
How do you account for the cost of a major component when the price varies depending on when and where purchased? Do you use an average expense for that component, to keep your prices for those items consistent, or do you vary the price of each item as it’s made, by the actual component use and cost?
How do you handle an unexpected increase in supply expense? Do you raise your own prices accordingly? Or decrease your profit margin in order to maintain your current prices?
The answers to these questions aren’t very straightforward, and vary from artist to artist. I can make a valid argument in either direction for each case! I encourage you to think through all of these and how each affects your business and artform. Many of us are in business for some form of financial gain: to make a living or cover the cost of your materials and supplies or to give to charity or to have a little pocket money.
In order to realize financial gain, your prices have to cover your direct and indirect costs and then some (e.g., “profit margin”). It is perfectly alright – truly it is – for you to both want to make and achieve a profit!
Share with us what you learned by examining your own hidden direct expenses? Do you have additional questions about direct costs?