2019-06-12 09:00:42 Business Planning English Craftsmanship is in. But, popularity doesn’t necessarily lead to profitablility. Discover what it takes to start, plan, and grow a... https://quickbooks.intuit.com/r/us_qrc/uploads/2019/06/Crafting-business.jpg https://quickbooks.intuit.com/r/business-planning/crafting-business/ Starting a crafting business: How turn your hand-made products into profits

Opening a crafting business: How to profit from your hand-made products

8 min read

Craftsmanship is in. Craft beer. Craft cheese. Craft shoes. Craft jeans.

Over industrialization has plagued shoppers with low-quality, cheap products that harm economies and the environment. Many argue that the resurgence of craftsmanship is overdue.

But, popularity doesn’t necessarily lead to a profitable business. What does it take to successful open a crafting business? What does it take to grow? As a business owner, approach your craft in three steps:

  1. Feasibility
  2. Organization
  3. Automation

Feasibility

To determine if it’s possible to turn your home based craft into a product line, start with a feasibility study.

You need a basic understanding of whether your business can turn a profit. You don’t necessarily need to earn a profit from day one, but you need to understand how you can get your business to profitability.

Conduct a feasibility study in four parts:

  • Test the market for demand
  • Analyze the competitive landscape
  • Plan your strategy with a proven template
  • Conduct both a financial and technical analysis

Market test

Just because you are passionate about your craft product doesn’t mean that everyone else will be. Test the market for demand. You can test the market informally through hypothetical conversations with potential customers, and product pitches. A single question drives a hypothetical market test:

If this product existed, would you buy it?

At the very least, ask this question to customers. If possible, supplement the question with survey questions:

  • How much are you willing to pay for the product?
  • How much of the product would you order?
  • Have you heard of others who want the product?

Ideally, your market test moves beyond hypothetical questions. Ask for commitments. See if you can get orders before you actually produce the product.

Sound unreasonable to sell a product that doesn’t exist?

The practice has become more and more popular. Most crowdfunding sites are built upon the pre-order concept. Individual backers, and often customers, give money to a founder to develop and bring a product to market.

You might not be able to close a sale before you have a product, but the more commitment you gain from a potential customer base, the better your market test will be.

Competitive landscape

Once you feel comfortable that the marketplace will buy your craft product, take a look at the competition. This includes alternative premium products that compete with your products from a quality and craftsmanship perspective as well as cheap alternatives.

If you craft custom jeans, you naturally use the highest quality materials to deliver the highest quality product possible. But, your customers have the option to buy cheap, low-quality jeans from big-box retailers when they are jean shopping. Don’t forget this in your competitive analysis.

Include all major competitors and alternatives and you will better understand price points, customer profiles, and how to best market your product.

If you are going to succeed in the craft marketplace, you must be prepared to convince a customer that your product is worth paying a multiple over the low price competitor.

Business strategy

A business plan template ensures that you, your investors, your employees, and any other stakeholders have a clear picture of what you want to accomplish and how you’re going to get there.

If you think you can go to market with a strategy in your head, think again.

One study that tracked more than 1,000 startups found that businesses with a written plan were 16% more likely to achieve viability. Another study found that those with formal plans grew 30% faster than those without.

It’s true, there’s no better way to learn than by doing, failing, improving, and repeating this process. But—the data is clear—a strategy will increase your chances of success.

Financial and technical analysis

You will cover some financial and technical analysis in your business plan, but you get into further detail in this step. Because a craft business is inherently hands-on from a manufacturing perspective, financial and technical analysis is crucial.

Many startups breeze through technical and financial analysis in the early stages because they plan on saving money in these areas when the company operates at scale. In such businesses, the cost of materials, machinery, and time needed to produce a unit should improve as the companies grow their operation.

Manufacturing at scale might not be a possibility for a craft business. Quality materials and a handcrafted process are core to the business. Accordingly, you won’t be able to shop for the cheapest suppliers, outsource manufacturing overseas, or skimp on other manufacturing processes that compromise the integrity of your product.

The technical requirements of product production must be understood alongside the financial implications—cost of labor, the time needed to produce a unit, etc.

In this analysis, make sure you understand the inputs required to deliver the outputs you promise the market.

Organization:

You have many options when it comes to organizing your business:

  • Sole proprietorship
  • Partnership
  • Corporation
  • S Corporation
  • Limited liability company (LLC)

If you started your business without filling out paperwork of any kind, you likely created a sole proprietorship by default—or a partnership, if you started your business with one or more co-founders.

However, once you start making purchases, sales, or preparations, you should consider formally organizing your business with a structure that separates business liability from personal liability.

The most commonly used small business structures that do this are the S corporation and the limited liability company (LLC). The U.S. Small Business Administration reports that nearly half of small business employers organize as S corporations.

Tax planning and legal liability are the primary reasons for organizing your craft business as an S corporation or LLC.

Both organization structures give you flexibility to develop a tax strategy that best suits your business and personal needs. You can avoid the double taxation created by the more traditional C corporation structure, but your business revenue doesn’t necessarily add to your ordinary income as is the case with sole proprietorships.

Tax planning aside, organizing as an S corporation or LLC offers you legal protection that you don’t receive from a sole proprietorship or partnership. As a sole proprietor or partner, business liabilities are considered an extension of yourself. As an S corporation or LLC, business liabilities are expressly separate from yourself and your family.

To illustrate, imagine you run a craft brewery. Your customers love your hands-on approach. But calamity strikes—an entire batch of brew leads to widespread illness across your customer base.

In the sole proprietor or partnership model, the business is liable for any damages and those liabilities extend to you personally as well. If the business can’t cover the damages, your personal assets (home, car, savings, retirement accounts, etc.) are all exposed and responsible to cover the business loss.

In the S corporation or LLC model, the business is solely liable for the bad batch of brew. Your personal assets are not exposed in the event that the business cannot cover the business liabilities.

Organizing under a structure that separates business and personal liabilities is a critical step to take early in your craft business roadmap.

Automation

From the dawn of the industrial revolution, businesses have focused on automating the manufacturing process as much as possible. Whether it’s Henry Ford’s introduction of the assembly line or Little Caesars move to make pizza with robots, businesses have long concentrated on taking humans out of the production process.

But manufacturing automation is counter to a craft business. The appeal and quality of your product is based on its handcrafted nature. Don’t compromise on this point. Take the time needed and use the highest quality materials … to deliver a premium product.

Automate everything else.

Use modern technology to replace human engagement wherever possible. From website design and marketing to accounting and shipping, streamline business operations with apps.

Automate everything except the product

Computers are replacing the back office: accountants, lawyers, auditors, insurance agents, distributors, sales agents, marketers, the list goes on.

Leverage back-office automation, so you can dedicate time to your craft.

Organize your business and create standard contracts with automated legal compliance providers. Examples include Legal Zoom and Incorporate.com.

Move your accounting, invoicing, payment, and payroll to the web as well. You can then integrate payment processors, time tracking, and invoicing with as many apps as needed to remove manual processes:

You need a website to promote and sell online; but, you don’t need to hire a developer. Use website and online store builders like Shopify, SquareSpace, or Wix.

Get rid of Rolodexes and business cards. Manage your customers through CRM packages:

Run email marketing campaigns at scale:

It might sound odd, but social media plays a major role in the craft marketplaces. Participate in social media, but cover all social media outlets from a single platform:

  • Buffer
  • Hootsuite
  • Sendible

Print shipping labels, track shipments, and manage shipping end-to-end without going to the post office:

Manage inventory from anywhere:

The above categories and associated services are not exhaustive. They only scrape the surface of what’s possible through business automation.

To keep your hands on product production, you must keep hands off of ordinary business tasks.

As a craftsman, your time is expensive.

In turn, customers pay a premium for your product. You can’t afford to hire people to manage your back office. Leverage modern tools to streamline your operation, so you can dedicate time and quality materials to delivering extraordinary products.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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