Tuesday, February 23, 2016

Some thoughts on inventory system tracking

Please note that this blog post does not constitute professional advice; for professional guidance, please contact your tax accountant. This post is simply my effort to share what I have learned about inventories over the past few years, and is intended to help other artists who may feel lost or overwhelmed, as I did. Although I hope it does not, this post may contain errors or inaccuracies; it certainly contains simplifications.

As an artist, it is important to have a system to track your inventory. When many (if not most, or even all) artists first start creating, having an inventory is the furthest thing from their mind. Maybe your art habit began as just a sketch book and some pens 13 years ago, and snowballed over time; perhaps you signed up for a local watercolor class, and found yourself falling in love with painting on the weekends, and one day someone asked you, "how much do you want for this?"; or it's possible that (like me) you've been creating art since you were in middle school, and you couldn't conceive of an inventory until you were swimming in art materials and potential sales years later.

If making art remains a hobby or you never sell a thing, perhaps you don't need an inventory. However, if you do sell, hope to sell, intend to sell, or plan to sell, then you must eventually put a proverbial stake in the ground and start an inventory. You'll need one in order to have an account of what materials you possess, to determine your profit per sale, to know how you are using (or wasting) your materials, and to complete your federal income taxes adequately. Specifically, you'll need this information to calculate the Cost of Goods Sold (COGS) for the products that leave your inventory on your Profit or Loss From Business (Sole Proprietorship), also know as Schedule C (Form 1040). If you are declaring your sales but aren't tracking your inventory, then you risk paying income tax on the materials you have purchased; the goal is to properly reduce your taxable income by the amount of costs you have invested in your materials that have left your inventory (profits - COGS = taxable income), and to declare your existing end-of-year inventory so that you have information to work from in future years.

When you first start your inventory, you may be faced with the problem I had: how to account for everything you already have. This can be overwhelming, but it is possible to get through the task without losing your mind. First, focus on what your principal product is. Are you primarily a painter who dabbles in clay on the side? If so, start with cataloging your painting materials, and worry about the clay later. Next, break down your materials for your primary product into categories. In my case, I had to figure out exactly how much paint I had in tubes and how much I thought was on canvases, how many canvases I had (painted or unpainted), how many feet of hanging wire I had (in paintings or on the spool), etc., and then I had to assign a cost to these things. I am a fairly meticulous record keeper, so I actually still had most of the old receipts for these items, although sorting through them and figuring out what was what took some time. If you don't have the receipts or you can't read them, then use the internet to find out the best pricing guess if you had to go buy the material today.

After I had the rough overall cost of what was in my inventory, I needed a system to track the assigned costs for each product, because as I sell a painting, I need to be able to then deduct the cost of those sold materials from the current inventory. The first item of business at that point was determining what constituted the basis of a product; for me, it became clear that this would be a support, whether that support was a stretched canvas, a piece of paper, or a cradled panel. Upon this basis, I assigned chronological inventory numbers. As each canvas enters my inventory (i.e., as each canvas I buy arrives on my doorstep), I immediately slap an inventory number on it. I am committed to creating a piece of art as soon as I acquire the support, even if I don't get to paint on it in the same calendar year as it enters my inventory. As such, a painting I make in 2016 may actually have a 2015 inventory number assigned to it, because that was the year the support entered my inventory.

How do I handle the tracking of the minutia? Well, this is a case where I have to try and be as accurate as possible, but acknowledge that a guestimate is often good enough. It's simply impossible to measure every ounce of paint as you are working! But I do have a general sense of how much I am using, and so as I work through creating my paintings, I deduct the approximate amounts accordingly.

At this point, you may be wondering how I deduct these amounts and keep track of the actual numbers side of things. Truth be told, I built my own spreadsheet with automated formulas and calculations. When I sell a piece, I change the Sold = No cell to Sold = Yes, and all of the inputs and totals change according to the formulas. If you are not versed in spreadsheet programs, then the answer is simple: either contract this work to someone whose business is supporting entrepreneurs with inventory systems, or do it by hand. Yes, I mean keep a log book whereby each page is a specification sheet dedicated to each project, reflected by the individual job number assigned, and then track all related costs: supports, paint, wire, hardware, framing, etc. Then have a section dedicated to the calendar year starting and ending inventories for unassigned materials (such as paint in tubes, stacks of paper, spools of wire, stretcher bars, canvas rolls, etc.). You'll have to do some calculations at the end of the year to find out your sales totals, COGS, and remaining inventories, but it is possible to do this. And as you purchase new materials, you'll enter the costs into the appropriate section of the log book. For example, if you contract your framing work to a frame shop, you'll want to tie the expense to a particular job number; if you do your own framing, however, then you'll have framing materials that you enter into the unassigned materials section, later moving cost amounts to specific job numbers as you frame your own work. No matter which method you choose, the important thing is that you account for everything, that you maintain copies of your records in case you get audited, and that you simply stay on top of things so you don't find yourself lagging behind.

There are clearly many related sub-topics that I could include as part of this post (such as a more in-depth explanation of the Schedule C as it applies to artists), but I have decided to keep this post limited to the nuts and bolts of my inventory process. I do hope to write a future post that includes the best resources I found while doing my research on inventories, including both books I checked out from my local library and websites. I am indebted to my friend Rebecca Sundermeier (Rebel Inn Studios) for her support explaining many of these concepts as they apply to the fine arts specifically, as opposed to entrepreneurs generally.

The art seen in the photo above is titled: Intimacy. 18 7/16 x 11 7/8 inches, acrylic on cradled masonite.

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