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Thursday, 19 January 2012

Free financial advice

So, you love making things. You've maybe already tried selling the things you make. You've realised it's more fun than your day job. But should you give up your salary just yet?

I want to share my thoughts on how you go about working out if you could support yourself by doing what you love full time. I accidentally sort of ended up making things for my 'job', but luckily I have a wonderfully supportive husband who is happy to pay the bills (which takes the pressure off a bit !). Being self-employed is an interesting experience...

Step 1: First of all have a think about what you do, and could, make. Take each item, or each group of similar items, and work out

a) How long it took you to make,

b) How much it cost you to make, plus any fees incurred when selling it, and

c) How much it could it sell for.

So, for example, I make cards.

a) They each take between 5 and 15 minutes to make. So I'll go for an average of 10 minutes.

b) They cost me about 50p in materials, 5p to list in my shop, 10p commission when it sells, and 27p paypal charge. So that's £0.92.

c) I sell them for £2.

Step 2a: Calculate how much profit you make in one hour. Take your answer to b) away from your answer to c), then divide the answer by a). Make sure you do it all in pounds and hours. So if it costs you 57p to make, use £0.57 pounds. And if it takes you 45 minutes, use 0.75 hours. If you struggle with the minutes/hours thing, here's a helpful calculator.

In my example you get:

 2 - 0.92 = 1.08

1.08 pounds / 0.167 hours = 6.47

So I make approximately £6.47 profit for every hour I make cards.

Step 2b: If you make more than one type of item, do the above calculation for each group. Then you need to work out your average profit per hour. To do this, add up all your answers for step 2a and divide by the number of answers you added together. If you only make one type of item, you can skip this step. Lucky you.

For example, I also make jewellery. I'll not print the calculation here, but I worked out that I get £7.26 profit per hour.

So the average is:

6.47 + 7.26 = 13.73

13.73 / 2 = 6.87

An average of £6.87 profit for every hour I make things.

Step 3: Next try to estimate how many hours a week you can realistically spend making things. Don't forget that you will also need to spend time on advertising and admin (like sorting out the website, listing items, taking trips to the post office). And you still want to be human at the end of it, so don't put down like 100 hours. Be sensible.

I probably spend a quarter of my time on admin, a quarter on advertising and the rest on making. Now, I don't work on my shop full time, but lets say I did and that I worked a 40 hour week. So I'd spend half of that, 20 hours, making things.

Step 4: Work out your salary. If you were to make as much as you think you can, and they were all to sell for the price you think they could sell for, how much would you earn in a week? Take your final answer to step 2 and multiply it by your answer to step 4.

For me this would be 6.87 x 20 = 137.30.

So I'd earn £137.30 a week (hypothetically). You probably want to calculate what you earn in a year so that you can compare it to your current salary. To do this multiply your answer by 48 (assuming you take 4 weeks holiday a year).

So in my example this is 137.30 x 48 = 6590.40.

There you go. If I worked 40 hours a week, and my estimations above were accurate, I'd earn around £6590.40 a year.

WARNING: this does assume that I sell everything I make that year. In the first year that's probably unrealistic. The earnings you've calculated represent an upper limit; the maximum amount you could earn once your business is running at full steam. So to get a realistic picture for the first year it's better to reduce the figure, maybe by a quarter if you think you could sell 75% of the things you make.

Step 5: Take a look at your finances, your committed expenses each month, and think long and hard about whether your answer to step 4 would cover it. If not, and you still want to turn your hobby into your way of living, you may need to work longer hours or consider changing the pieces that you make to give you a larger profit margin per hour (i.e. make items that take less time and cost you less money, but sell for a higher price). If the figures look good, go for it... after you've double checked them of course !!

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