Guest Post: Bookkeeping for Indie Dyers

Hi! I’m Lauren, the dyer behind Old Rusted Chair. I’m taking over Krista’s blog to talk a little about a concept that scares most small business owners: Bookkeeping! I have a bachelor’s degree in accounting and more than 10 years worth of experience ranging from handling accounts payable at a grocery store to being controller at a tea company. In between I’ve done bookkeeping for my old LYS and helped a startup in the natural food industry build their accounting department.

Before we dive in, all of this is assuming your business is up and running within your state andcity guidelines. If you’re not sure, go to your state government website and find out what you need to do to operate a business there. States may have different requirements for different types of businesses. My business is a sole proprietorship, which means, in Tennessee, I had to register at my county clerk office. I also had to register with my state revenue department so I can pay forward any sales taxes I collect. Tennessee does not have a state income tax, but I do have to pay a business tax to the state and city.

On average, I spend about an hour a month on my bookkeeping work. I break down my tasks into weekly, monthly, and quarterly tasks to keep things manageable. First, you need to choose your preferred method of record keeping. I currently use QuickBooks Self-Employed (QB). It’s simple to set up and use, and makes it easy for people who aren’t accountants to keep track of their accounting. It can link to your bank, PayPal, Etsy, Stripe, and other accounts to keep track of all of your income streams. The ability to include all of these income sources made it very easy for me to transition from Etsy to Squarespace Commerce. It does have its downsides, but in my case the downsides aren’t worth the expense or effort of having a different software. For example, the expense accounts listed in QuickBooks are preset; you cannot change them or add new ones. I think this is a big misstep, because I’d love to have the flexibility to add a few new accounts so I can break out my expenses in more detail. Overall, for the price and convenience, I’m sticking with it for now. There are other options out there, such as Xero, Freshbooks, Excel, and even Google Sheets. Do some research and find out what works best for you.

Let’s move on to my workflow. Breaking tasks up makes it easy to fit them in my schedule, and sets good habits for staying on top of the work. I prefer to do my bookkeeping first thing in the morning with a fresh cup of a coffee. Then I can spend the rest of my week focusing on the creative part of my job and not have these small admin tasks lingering over my week.

Weekly: I categorize transactions in QB. This takes me about 10-15 minutes depending on how busy my week was. The majority of my transactions are sales and transaction fees, but I also purchase supplies and make donations. Recording and categorizing these weekly means everything is fresh in my mind (and easy to find in my email) so I can quickly move through transactions. It’s much easier to find what that $21 charge from Amazon was when the transaction was last week and not four months ago. Additionally, I add any mileage for trips to the post office or other business-related car trips. This is also a great time to place orders for any supplies you need.

Monthly: Pull sales numbers from Squarespace. I have a general idea of what colors and bases sell best, but I like seeing the numbers. I make a monthly donation to Planned Parenthood based on sales of one of my colorways, Rebel Girl, and this report lets me know how many skeins sold so I can make my donation accordingly. If you’re selling off of Squarespace you can find this information under Commerce > Orders > Export (in the upper right corner). Etsy users can find this under Shop Manager > Orders, then scroll to the bottom to download a CSV file. I also spend a few minutes looking through my supplies and seeing if I’m running low on any dyes or other materials that I don’t order as frequently. I also pull a profit and loss statement from Quickbooks.

Quarterly: Tax time! Most people I talk to wait until April to deal with this, which usually isn’t the best decision. You should be making quarterly tax payments if you expect to owe more than $1,000 for the year, according to the IRS . The IRS wants their money and could penalize you for not paying quarterly. Think back to the days when you received a paycheck from an employer. All of those tax deductions from your paycheck were forwarded by your employer to the IRS on your behalf. Now that you’re your own employer you are responsible for paying the IRS. There are a few ways to go about doing this. You can either pay directly to the IRS online or by sending a payment in the mail. It’s also worth checking to see if you can pay through your accounting software. Either way, you will need to register on the IRS website. QB estimates my quarterly taxes based on my net income (total sales minus total expenses) and my current tax bracket. I file a joint return with my husband, so I include his information for a more accurate number. After a quick set up I am now able to pay the IRS directly through Quickbooks by clicking a few buttons.

Another tax you need think about is sales tax. When I ship or sell to a direct customer in Tennessee I am required to collect 7% state sales tax. If my customer is in Davidson County I need to collect an additional 2.25%. Your sales platform should have the ability to enter in your state and city sales tax information so your customer will be charged automatically. If you are sending wholesale orders to a LYS in your state the rules are different. I drop off shipments to my LYS, but do not charge them sales tax. This is because they will be collecting sales tax from their customers and paying it to the state. If you’re selling to a LYS in your state you can ask them for a copy of their resale certificate (if applicable in your state). I forward sales tax payments to the state quarterly, using sales tax information from the monthly sales report mentioned above.

Finally, I need to pay business taxes to the state and city. I won’t go into details on this particular tax because your mileage will vary greatly based on what state you’re in. It’s best to check with your state revenue department to figure out what, if anything, you owe and when you owe it.

Bookkeeping doesn’t have to be scary or overwhelming. By breaking tasks down into workable pieces you’ll find a good rhythm quickly. If you’re starting from scratch I recommend that you stay current on your new transactions and spend an hour at a time working backwards. You don’t need to get the backlog of transactions done in one sitting. Breaking it up over a few days or weeks will help your sanity in the long run.

Thank you, Lauren, for this amazingly informative post! 

Lauren's website


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Pricing, Profit, And Wholesale

To wholesale or not to wholesale? It's a question I see coming up again and again in forums. 

First, when it comes to wholesale pricing, it can vary. Typically it's been 50% of your retail price, but I'm happy to see that more and more dyers aren't doing that because of the already slim margins. 60/40-- where the store is getting 40% off the retail price seems to becoming more common, and I'm also seeing 70/30, which is what my terms are, and which I think is ideal for indie dyers. 

However, you need to know what your retail price is, what the profit is that you are making from that, and then you can calculate a hypothetical wholesale price and make an educated decision from that. Especially if you are hiring help...otherwise you can end up in the situation that I did at one time, where I was actually losing money with every wholesale order. That was a pretty big shock, although entirely my fault, since I hadn't run the numbers. 

Numbers and math are not my strong suit, to put it mildly, but luckily I have a partner who runs a successful company (Mil-Spec Monkey), one of the most logical and practical persons I've ever met, and helped me figure out calculations for this post. 

We're starting with a hypothetical order of 48 skeins of American Sock. First, we need to figure out the raw material costs. 48 skeins is the number I can get from 4 cones of Tahoe from Ashland Bay. 

I sell my yarn in skeins of 400 yards. Tahoe comes in 3 lb cones, 5040 yards/cone, so I can get about 12 skeins from one cone, and 4 cones is what I need to purchase to get the lowest price per cone.

Price per cone: $69
4 cones: $276
Shipping costs (don't forget this!): $18.62

More than yarn goes into dyeing, though, so we also need to calculate the cost of dye and citric acid and labeling. I use a lot of different dyes, but I decided to use a packet of Cushing's Dyes as a measurement to make things easier. 3 packets of Cushing's Dyes (1/3 oz per packet) will dye a 3  lb cone. 

3 packets plus an estimated $3 shipping: $12.75/cone.
4 cones: $51

I use citric acid, which I buy in bulk of 50 lb bags (I bought my most recent stock from soap 
50 lb bag: $64
Shipping: $45.48
Total: $109.48

I estimate that I use about a cup of citric acid for 6 skeins the way I dye, so for a 48 skein order I would use 8 cups, which we'll round to about 8 oz to be on the safe side. 
800 oz (the total bag) divided by 8 oz: 100 cups
This breaks down to $1.10/cup
8 cups at $1.10/cup= $8.80

Labels (I use tags): For 1000 tags I paid, with shipping, $115.75.
$.12/tag is what it breaks down to, so
48 tags: $5.76

So for raw materials cost for a 48 skein order we have:
Yarn: $294.62
Dye: $51
Citric Acid: $8.80
Tags: $5.76
Total raw materials cost: $360.18

Now, let's figure out the time I spend on that order. I'm being a little optimistic here on time, as I'm not including the drying time and time taken to let yarn cool before being rinsed off, and general faffing about time that inevitably we all do a little! That would be something to keep in mind. 

Since I buy my yarn on cones, I need to break those cones down into 400 yard skeins before I can start the order. My skein winder does 3 skeins at a time, and I'm estimating it takes 5 minutes for 3 skeins in that case. 
48 skeins at 5 minute/3 skein set: 80 minutes.

The way I dye multicolor yarn, I can do 8 at a a time, and it takes me about an hour and a half per batch for the actual dyeing. 
48 skeins: 9 hrs total

I used to re-skein, but I'm starting not to, and I know a lot of people don't, so I'm not including that time. If I was to re-skein, I would of course have to add in those costs.

Twisting and labeling  for 48 skeins: 1 hr

Total hours: 11.4, rounding up to 11.5 hours. 

Now, I need to figure out how much I want to pay myself. I want to pay myself $25/hr.
$25 times 11.5 hrs: $287.50

So, adding the raw materials cost, $360.18 with my time, $287.50, gives me a total of
$647.68 for how much a 48 skein order costs me. 

I charge $26 per skein retail, so
$26 times 48= $1248

So, I'll take that number, $1248, subtract how much the order has cost me to make, so
$1248-$647.68= $600.32 profit
$12.50 profit per skein

Not too shabby. However, what if I want to do wholesale, and at what percentage? 

If I did 50% off, the wholesale price per skein would be $13, so for a 48 skein order, I would be making $624. However, the order has cost me $647.68, leaving me with a debit of $-23.68.  

If I did 30% off the retail price, 30% of 1248 equals  $873.60, so my potential wholesale price for 48 skeins would be $873.60, leaving me with an owner profit of $225.92. 

This is with me paying myself $25/hr. If I was fine with paying myself much less, like $12/hr, making my total costs $498.18, then 50% wholesale pricing would give me an owner profit of $125.82. I give that as an example so that if you are thinking that you'd be totally fine with paying yourself less per hour, you still wouldn't end up with much profit at all. 

And, we've actually left out a few numbers that would figure into all of this. Shipping supplies, time spent doing that, for instance. But also very important ones like rent, mortgage, utilities, water, Etsy fees if on Etsy, PayPal or credit card transaction fees, website, advertising. If you're paying someone for help, that would make your margins even less. You can see how one can lose money with wholesale easily. Too easily. 

Then, let's say I want to make $30,000 a year. I would have to make $2500 a month, meaning I would have to sell 200 skeins a month full retail price, also keeping in mind the additional costs that can factor in that we discussed above.

Those are things you need to think about. If you're thinking about wholesaling, you need to really think about it. This is why I get worried when I see wholesale being thrown out there as a suggestion when a dyer is having money issues, because it may not be the right decision for that dyer at that time. I've also heard wholesaling being used as a tactic to compete amongst the saturated market, and while I understand wanting to get the word out, I personally don't think it's the best tactic unless you've already got your finances all figured out and are comfortably making a retail profit, enough to live on, already. 

I cut way back on what I was offering for wholesale, and changed my terms to 30% after that horrifying realization that I'd been losing so much money, plus I haven't been seeking it out. However, I'm not taking any wholesale orders on right now, or for the forseeable future, due to the massive -- and really weird--physical issues I've been dealing with, which you can read about if you want here. I've done a couple of collaborations with Knit-Purl here in Portland, but both projects, the yarn and the colorways, were exclusive to the store, so I was able to make sure I made the profit that I wanted.

(disclaimer: that link is to the insane saga of my last three months, but it is on a medical and illness go fund me page. Starting that was one of the hardest decisions I've ever had to make, and I still feel uncomfortable about it, (although there was no other option) so I'm just going to link to it and emphasize that I have no expectations of and am not asking for contributions, especially from anybody who doesn't know me personally. It's an really interesting story, though, as it's something that nobody's seen before. I guess yay for being original?) 


Pigeonroof Studios and Knit Purl collaborations

Pigeonroof Studios and Knit Purl collaborations

I think that wholesale is something that as new dyers we think is or should be the next step, and these days I don't think it always is or should be. We're not making a mass produced commodity. We're making a product by hand, that is time and labor intensive, so why wholesale? To get the word out? Because all the cool kids are doing it? When I started, it was before Ravelry, before Instagram, before Twitter, before Facebook got popular, so it was harder to get the word out, making wholesale as an advertising option something to consider. Now, however, with all the social media platforms available to us as well as Ravelry, there are so many advertising options, whether going for native reach or purchasing ads. So ask yourself that question, and be honest with yourself, why do you want to wholesale? 

Sundara, of Sundara Yarn, with the exception of once at the very beginning of her career, has never done wholesale. I'm going to try to get an interview with her at some point to talk to her about that, because I think that's awesome, and shows more common sense than I ever had. In the end, though, you will have to figure out what is right for you. I just don't want you to blindly go into wholesale, like I did, and end up losing money, being stressed, and generally not having a very good time. 

If you read this, however, and think, 'yeah, whatever, I still want to do wholesale', then hey, go for it. Just go slow. Try one small order and see how that goes, before taking on multiple orders. Really make sure all your bases are covered and you feel like you have a steady financial base to work from. 

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Hot Tips Tuesday: Stability.

"Start from a place of stability if possible. If you go all in and it doesn't work out quickly, it's quickly going to become a train wreck of freaking out. Either have a lot of money saved up, or start it as a hobby, because "I'm going to lose the house if this doesn't work out" is going to cause bad decisions. You'll end up doing whatever it takes to survive one day more, even if it dooms any sort of long term viability." 

 Mil-spec Monkey