Handmade jewelry, hand-crafted decorations, hand-carved wooden furniture: you make it, they buy it! For artisans, makers of handmade goods, and other craftsmen & women, ecommerce has been a lucrative and convenient market to sell their goods. But the thing about the online craft business is that it’s a business — if you’re not familiar with topics like inventory management, how can you run a successful ecommerce store?
In this beginner’s guide, we explain inventory management for homemade goods, including terminology, expert advice, and everything else you need to know. It’s time to cash in on your passion!
Why the Crafts Business Needs Inventory Management
If you’ve dedicated your life to a craft skill, the art of business might be foreign to you. Aspects like inventory management may seem unnecessary if you’re used to a made-to-order model.
For one thing, inventory management can help your online store grow and scale accordingly, giving you the resources and budgetary breathing room to expand and take on more orders. That’s one of the larger benefits, but there are other, more legally-binding advantages to inventory management for makers of homemade goods.
Chances are, your government and tax institutions require official online sellers to track their inventory value. For most retailers this is simple enough, but craftsmen and women are at a disadvantage with a lot of gray areas. What constitutes inventory, raw materials or finished goods? How do you value these goods, by manufacturing cost or final value?
To answer these questions, it helps to first understand the commonly used words in inventory management.
Inventory Management Terminology for Craftsmen & Women
If you’re new to handling your own sales, you may not be familiar with the inventory management terminology. Here’s a quick glossary of important terms and concepts online sellers should know.
- Raw Materials — The items used in making craft goods; the “ingredients.” (Ex.: lumber, jewelry beads, sheet metal, etc.)
- Finished Goods — The final, salable product. (Ex.: A wooden chair, a handmade necklace, etc.)
- Supplies — Materials needed for crafting that are not raw materials. For example, tools and instruments — like hammers, paint brushes, or scissors — are supplies. Some raw materials that are small or hard-to-trace are considered “incremental supplies,” for example, glue or twine.
- Lead Time — The amount of time it takes you to make a certain number of products. If you sell 20 bracelets a month, the lead time is how much time it takes you to craft 20 bracelets. The number of products that make up the lead time depends on your sales cycles. Lead time is an important value in inventory management, as it tells you the ideal time to reorder raw materials, and their amounts.
- Work Orders — Requests for goods that require crafting; the handmade business’s equivalent of a sales order. Work orders are only for goods that have yet to be made; if you’ve already pre-assembled a backlog of items in stock, you’ll use sales orders instead.
- Cost of Goods Solds (COGS) — How much the goods cost to make, including the sum cost of raw materials, but not including the cost of supplies.
Best Practices for Inventory Management of Handmade Goods
Inventory management for the crafts business is not easy, especially if you’re new to ecommerce. Here’s some best practices to help you get started.
Reorder Value = Average Daily Sales of Product × Lead Time
How much of each supply do you need to order each time? First, find the average daily sales number of the product in question and then multiply it by the product’s lead time. So, if you sell an average of 10 necklaces a day, and each necklace takes one week to make, you should order supplies for 70 necklaces every week.
Deducting Inventoriable and Non-inventoriable Items
The difference between inventoriable and non-inventoriable items is an important one, especially during tax season. These are terms used mainly for tax purposes, but in practice they refer to raw materials (inventoriable) and other supplies (non-inventoriable).
Why does it matter? Inventoriable items can only be deducted from taxes after that item has been sold; it’s included as part of the COGS in the year the sale was made. Non-inventoriable items, however, can be deducted the year they were bought.
So, for example, let’s say you just bought a new buzz saw and 20 pounds of lumber. You can deduct the buzz saw from your taxes this year; but you’ll have to wait until next year, when you start crafting and selling your wooden goods, to deduct the pounds of lumber.
Be Smart about Sourcing Materials
One of the best practices in ecommerce, both inside and outside the crafts business, is to lower overhead costs as much as possible. If you’re a maker of handmade goods, overhead costs refer to raw materials, so you want to buy them at the best value possible.
Buying raw materials in bulk usually helps if your supplier offers price breaks (and if they don’t, you should find one who does!). You can use the equation above to calculate your ideal reorder value per lead time.
For more advanced techniques, read our guide The Best Ecommerce Product Sourcing Strategies for Artisans. This covers more extensive strategies for acquiring materials, as well as ways to improve your sales of finished goods.
Conclusion: Inventory Management Assistance
Breaking into ecommerce as a beginner is never easy, but for craftsmen and women it’s especially difficult. Sales and business use a more methodical skillset that’s on the opposite side of the spectrum as the more creative and artistic talents of crafting.
The good news is that you don’t have to go through it alone. Automated ecommerce software like ecomdash is designed for beginners to circumvent the trickier and more convoluted aspects of ecommerce. Our software can monitor your inventory, set reorder alerts, create work orders, and track raw material levels — all automatically and with no micromanaging. Click here for your free 15-day trial, no credit card needed!