Estimating Business Expenses in a Needlework Business

Although the point of business is to generate take-home pay, businesses cost money to run in order to generate that take-home pay.

Before you jump in feet first, it's nice to have an idea what part of your business income will be yours to keep and what part will be eaten up by business expenses and taxes.

Details on terminology:

Your business's gross income is all the money you take in before anything is subtracted from it for expenses, taxes, and funding your retirement account.

[Adjusted] net income is your what's left after these three things have been taken from it. That is, your take-home pay.

If you know your business's gross income, you can "guess-timate" the amount of money you'll end up with in your pocket when all is paid and done. A general guideline is to take 15% of your gross income for business expenses/taxes.

To estimate take-home pay for the year, multiply your business's annual gross income by 0.15. Subtract this sum from your projected gross income. The answer is your take-home pay. For example, suppose you project you will make $10,000 in a year in gross income. From this amount, 15% will be for business expenses: 15% of $10,000 is $1500. Your take home pay is what's left over:

Depending on the type of business you have - - self-publish your designs, have a retail shop, do kits for someone else - - the 15% may be off. Different types of businesses have different types of expenses.

To be more spot on in your guess, see if you can rustle up someone in a similar business situation and ask for their rough estimate of expenses versus gross income. They may say no, but it's worth a shot. Proximity is also a factor: you might be able to get some general information from a shop owner who is on the other side of the country more easily than from someone in the next town.

Failing this, try to find someone in a similar-non-needlework business. You probably can find more sector-specific information in a small business publication the covers your particular business endeavor (example: sole-proprietorship retail). Check the bookstore and the library. All these purchases are write-offs; save the receipts.

Or, maybe your accountant can help make a guess for you. (The 15% came from my accountant, incidently.)

The Small Business Administration has numerous publications, and these are free. Such titles include start-up signage, writing business loans, marketing, employee relations, and on and on! Go to the site and follow every link. It's treasure trove of information. And you, the taxpayer, paid for it. Use it! The SBA also has a mentorship program where you can be paired with a retired executive for one-on-one advice. (This program is not available everywhere, of course, because there might not be anyone who lives near you who is a good match.) If you are a woman, disabled, or a member of a minority, there are special programs just for you. Take advantage of these!

Note also that you also will have start-up costs. These may be direct write-offs, or they will be depreciated. Your accountant will have this answer for you. Decide whether you need the most cash now (likely) or whether you want start-up expenses spread over several years to decrease the amount of money you'll owe taxes on. These will be above your 15/whatever% estimate.

Using the percentage you establish as most likely to be accurate, do a rough projection of expenses for your business. Doing this is a very good thing because it helps you get a feel for whether it's financially feasible to go into business for yourself.

Suppose you are thinking about teaching at a national stitch festival. If you estimate your annual gross will be $10,000 from classes, and it will cost you $5000 for kit materials and transportation/lodging, you might want to rethink things. Maybe you'd be better off teaching locally or for venues where your transportation/lodging are paid by the sponsoring group or which are close enough that you can drive. Or maybe you should invest time this year in designing and marketing, putting off until next year those proposals to teach nationally.

The 15% figure is also handy when analyzing your business activities for the past year. If you find your expenses/taxes running over 15% of your gross income, this is a red flag that you may need to change your business practices.

There is something else you can do to maximize your take-home pay: fill out a Schedule C when you file your family's annual 1040.

copyright 1999-2002, Martha Beth Lewis
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