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 progressing*.
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 if you mostly sell online you could open a PayPal account that you only process business related expense and sales though. This will save you many hours of wading through your transactions deciding which are for the business and which are not. 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.
Store your receipts
Keep receipts for everything you purchase - offline and online. For online purchases, either print a backup copy and file it with your paper receipts or create a special folder in your email program so you can quickly access these records if and when you need to.
Track your Sales
As with your receipts, you should keep good records of all sales you have made, how much you charged and note any discounts you provided to the customer. 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).
Calculate your Cost of Goods Sold
You will need to keep track of your Cost of Goods Sold - this is often very tricky to calculate as you need to track the exact usage of materials and expenses for each of your finished products. Specialised software for craftspeople like Craftybase Inventory Software use GAAP and IRS approved methods to calculate your inventory and material usage.
Ensure that you are aware of any regulations and requirements relating to your products. 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.
Tip: Craftybase provides features that provide you with full traceability of your materials through to sale.