How to keep good records for your Craft Business

As you start to build your craft business, it becomes increasingly important to keep good records of your incomings and outgoings. Not only will having a more organised inventory make it much easier to fill out your forms when tax time rolls around, it will also give you a much better idea about how your business is fairing cashflow wise, the profits you are making and the rate at which your handmade business is growing.

Keep your business finances separate

Firstly, try and keep your business finances separate from the rest of your personal banking - either open a new bank account under your business name, or as a starting point you could open a PayPal account that you only process business related expense and sales though.

Good structuring of your finances early on will save you many hours of wading through your transactions deciding which are for the business and which are not.

Note: Also remember that some countries and states will often disallow certain expenditure claims on tax returns if you cannot show that the expense is directly business related.

Decide on the best structure for your business

It’s important to make sure that you have structured your business correctly, this will also be useful when it comes to tax time. This structure will also determine what tallies you’ll need to report to the IRS, and how often these filings are due.

There are a couple of choices available for structuring handmade businesses, so it’s vital to do your research to ensure that you have selected the best option for your situation. As a general rule, sole proprietorship means you are personally responsible for any issues that arise with your business. Limited liability (LLC) setups allow you to separate you and your finances from your business, protecting you from future legal issues.

Track your purchases and store your receipts

Receipts are your proof of purchase that acknowledges that a payment has been made by your business - either offline or online. They are important documents for businesses as the tax man often requests these if you are the unfortunate target of an audit, so you’ll want to ensure that you have a system that allows you to keep track and manage these right from the get go.

For online purchases, there are many software options you can consider for receipt storage and tracking. A good option for small business expense tracking is Expensify, which offers a small amount of receipt scans free per month. They also offer a handy mobile scanning feature for your offline receipts.

Another option for receipt storage is to create a Dropbox folder, or even a folder on your computer. If you are more of a paper based person, you can even consider printing out each receipt and storing in a paper binder.

Whatever receipt tracking system you choose, you’ll want to make sure it allows you to quickly locate receipts for certain purchases and/or date ranges.

Track your handmade sales

It’s also important to keep good records of your orders: these are the sales you make to your customers. You’ll want a system that ideally has the ability to record these details:

• The order date
• The customer name and address
• The exact products ordered and their quantities
• Any discounts applied to the order
• Tax paid on the order
• Shipped date

A good option for tracking your sales when starting out is via a spreadsheet, however you can also use systems designed specifically for order tracking.

Sales fees from selling online (such as on eBay or Etsy) should also be recorded, as well as any bank fees or transaction charges (like PayPal).

It’s important to understand exactly how much in fees and charges each of your sales channels take, as this can make a huge difference to your pricing strategy.

Etsy has one of the more complicated pricing and fee structures, so we’ve created a comprehensive guide to fees and charges here:

The Ultimate Guide to Etsy Fees (2024)

Calculate your Cost of Goods Sold (COGS)

If you are selling products you directly make, you’ll most likely be needing to report your Cost of Goods Sold to the taxman on an annual basis. Calculating COGS accurately can often be time consuming and difficult, as you need to track the exact usage of materials and expenses for each of your finished products.

Tip: Specialised software for craftspeople like Craftybase Inventory Software use GAAP and IRS approved methods to calculate your inventory and material usage.

Be Compliant

It’s also important to ensure that you are aware of any regulations and requirements relating to your handmade products to ensure you stay on the right side of the law.

Products consumed directly by people (i.e. food, soaps) will most likely be subject to GMP, whilst sellers that make fabric based items will be covered under the juristiction of CPSC.

For these types of products, keeping detailed records of your material usage is really important as you’ll need to be able to identify exact batches sold to customers in case of recalls. Read more about why you should use a lot tracking system »