Book keeping and working out cost of materials for crafting

Completelylosty

I have been thinking about starting a small crafting business from home, and I was looking at the bookkeeping side of things. I’ve looked at YouTube videos and also HMRC website but I’m still confused, so I will be grateful for any help given, thanks. 

I understand that I will be using cash basis accounting for HMRC. Using a spreadsheet, I will record all items sold, minus materials, postage, ebay/Etsy fees etc and come to an item cost. For example, an item is sold for £5, minus the cost for making and selling that item, means my profit for that item is £4. The spreadsheet can calculate my profit for each month and total for the year. 

Question one. How do I work out the cost of materials for one item? If I bought one bottle of glue, a roll of sellotape, a bottle of glitter. Do I have to work out how much each dab of glue, a length of tape cost for each item? I understand it will have to be an estimate and it can’t be accurate, but worry about under estimating and short changing myself or over estimating and getting in trouble with HMRC. 

I will also create another spreadsheet for the financial year, with gross profit, minus all business expenses (materials, stationery, equipment, insurance etc) and total net profit. 

Question two. Do I claim the cost of materials as a one off total expense or do I claim the cost of materials as what I use for each item sold? For example, can I bulk buy materials, keep the receipts and log this as a total expense in the first month, even if I haven’t used all the materials?  

Sorry for waffling, I hope my post makes sense, thanks 

Penguin_

No, you don't need to go down into such detail for cash basis.

You expense the item in the month you bought it.

Brie

If you're already making things (which I assume you are) you should already have a feel for how far materials go.  So it might be a "I've made 20 of those and hardly used any glue so let's say glue is costed at £X/100".  If you find that you use significantly more or less you can adjust your costs over the course of the year.

As I understand it you take the total cost of materials (so glue = £5 a bottle not 2p a dab).  Because you need the glue no matter what to make the item and while 1 glue might make 100 items a bottle of glitter might make just 5.  And you might find that despite buying blue glitter no one wants blue glitter items and you have to discount them at some point.  That won't change the cost of the bottle of blue glitter.

Completelylosty

Thank you for your replies. 

So, to check my understanding, if I make under £1000 trading allowance, I do not need to register as self employed or inform HMRC. But I will still need to keep a record in case they ask for it or for when I do start earning more than the trading allowance. 

To start, I will just need a simple spread sheet with a record of monthly Gross income, minus all expenses and total net income? 

My expenses will be quite high in the first month due to buying equipment and stock etc. So, my total net income can stay in a negative figure for many months until I have recouped my costs? I can also carry the negative figure over to the following year if I continue to have low sales, is that correct?

Thanks 

Savvy_Sue

Completelylosty said:

I understand that I will be using cash basis accounting for HMRC. Using a spreadsheet, I will record all items sold, minus materials, postage, ebay/Etsy fees etc and come to an item cost. For example, an item is sold for £5, minus the cost for making and selling that item, means my profit for that item is £4. The spreadsheet can calculate my profit for each month and total for the year. 

I know you're just using round figures as an example, but just wanted to make you aware that if you cost your time properly, your margin is likely to be much much smaller than in your example. Either that, or you'll struggle to find buyers. It is, IMO, perhaps the most difficult question in this kind of self-employment.

For example, at Easter you'll often see creme eggs for sale inside little knitted chickens, and at Christmas there will be smaller chocolates inside Santa hats, at school fairs and the like. I don't know how long it takes to crochet each of those little chicks, and the hats would be faster. I know I couldn't knit, sew up and stuff a chick's head in less than 2 hours; possibly I could do a Santa hat in an hour - although I understand crochet is faster (if you can get your head round it). No-one's going to pay £10 for something like that. 

It might affect what you choose to make and sell - choosing things with a 'wow' factor which don't take long to do would be my advice! 

Mistral001

It might be a good idea to cost the materials for each item so as to arrive at a price to charge for said item, but as has been said you do not need to do this for tax purposes.  This is because that when pricing materials for each item, you will usually only estimate the cost as you need to take into account waste and other imponderables and most people will err on the high side.  If you err too high on the high side however, when you come to doing your accounts at the end of the tax year, you will be claiming expenses that you actually did not incur.

DullGreyGuy

Completelylosty said:

Thank you for your replies. 

So, to check my understanding, if I make under £1000 trading allowance, I do not need to register as self employed or inform HMRC. But I will still need to keep a record in case they ask for it or for when I do start earning more than the trading allowance. 

To start, I will just need a simple spread sheet with a record of monthly Gross income, minus all expenses and total net income? 

My expenses will be quite high in the first month due to buying equipment and stock etc. So, my total net income can stay in a negative figure for many months until I have recouped my costs? I can also carry the negative figure over to the following year if I continue to have low sales, is that correct?

Thanks 

Remember that trading allowance is revenue not profit

Under cash accounting life is simple... you've made a sale once you've got the cash and you've had an expense once you've paid the bill. For HMRC purposes there is no need to work out a per item cost etc... if you wanted to use the accrual method, or had to because you were forming a company, then the accounting gets more complex.

With cash accounting you cannot offset your losses in self employed life against other incomes and so your only option is to carry the loss forward if you still haven't made a profit by April next year. 

Completelylosty

Thank you all so much, for helping me understand the boring but the most important part of becoming self employed. Hopefully, I can soon begin the fun and creative part. X 

DullGreyGuy

Completelylosty said:

Thank you all so much, for helping me understand the boring but the most important part of becoming self employed. Hopefully, I can soon begin the fun and creative part. X 

Make sure you tackle the frustrating bit about how you are going to find your customers/ how your customers are going to find you.

As long as you enjoy the crafting side enough and dont care about a profit then its fine... when you workout how much per hour you are working for or how much you'd have to charge for your products to achieve £12/hr when you factor in time spent on non-production it can be disheartening 

Mistral001

DullGreyGuy said:

Completelylosty said:

Thank you all so much, for helping me understand the boring but the most important part of becoming self employed. Hopefully, I can soon begin the fun and creative part. X 

Make sure you tackle the frustrating bit about how you are going to find your customers/ how your customers are going to find you.

As long as you enjoy the crafting side enough and dont care about a profit then its fine... when you workout how much per hour you are working for or how much you'd have to charge for your products to achieve £12/hr when you factor in time spent on non-production it can be disheartening 

If this is only a hobby then you can work for as little you want.  You can even make a loss just for the experience.  You will probably learn more about business than many business courses will teach you, but as DullGreyGuy says, if you want to make this a business to provide an income, you will have to charge to cover a lot more than your time than you might at first think.  It depends on the business, but most businesses will charge at least twice what they expect to get per hour.  So if you think you will be happy with £12 per hour, you need to charge £24 per hour at least.