If you’re an Etsy seller, it’s important to know what a bill of materials is and how it can help you run your business. BOMs can be helpful for determining the cost of producing a product, calculating your margins, forecasting inventory needs, and assessing supplier pricing (amongst a whole host of other advantages).
In this blog post, we will discuss why you should be creating Bills of Materials for each of your handmade products.
What is a Bill of Materials (BoM)?
A bill of materials, (otherwise known as a BOM), is an important tool for any handmade seller. It provides a list of all the materials and components needed to make a product, as well as the costs of each item.
A BoM looks and acts in many ways like a recipe you would use when cooking a dish, as it simply outlines what you need and how much you need of each ingredient.
Let’s say you are a soapmaker. In order to make a batch of 6 bars of cold process soap (such as this example from the Soap Queen) you need materials like water, oil and lye.
Each of these ingredients should be listed on your BOM, along with the quantities and costs of each ingredient needed something a little like this:
8 oz. Coconut Oil $1.30
15 oz. Olive Oil $1.63
11 oz. Palm Oil $1.29
4.8 oz. Lye $2.06
11.2 oz. Distilled Water $0.23
Tallying up the material costs gives you a total cost of $6.51 for your batch of 6 bars.
Dividing this tally by the number of bars of soaps produced will give you your base cost per bar, which is $1.085
Now that you know how much it costs you to produce a bar, you can now figure out how much to charge based on the profit margin you want to make.
Advantages of creating BoMs
Outside of the advantage of now being in control of your pricing, there are a whole lot of other pluses in tracking your product Bill of Materials.
When you need to create a new batch of your products, you can simply refer to your BOM to see how much you need. This is now your master list of ingredients for each product you make. It’s a good idea to file this as part of a bigger manufacturing record that includes your methods, equipment and tools required and any other information important to creating standardized products.
Similarly, if you are also tracking your inventory levels, you can use your BOM to see what needs to be restocked based on the products you need to make and what your current stock levels look like.
In short, a BOM is an essential tool for managing your manufacturing process.
Cost savings using BoMs
In addition, the BOM can also help to identify any potential areas where cost savings can be made. For example, if you find that you are using a lot of expensive materials across your products, you may be able to save money by finding cheaper alternatives.
You can then quickly compare the cost saving and simply recalculate your new profit margins.
A BOM can also be used to track trends over time. For instance, if the cost of certain materials goes up, you will be able to adjust your prices to react quickly to the situation, before you start to lose your margins. This is important in a world where fluctuations in fuel prices and political situations are creating significant changes in prices on an almost daily basis.
Tips for creating your Bill of Materials
If you don’t already have your bill of materials worked out for your products, now is a great time to get started. Here are some quick tips:
Start by listing out all of the raw materials and components that are needed to produce each of your products. Include both standard and optional items.
For each item, include the supplier name, any item numbers that uniquely identify the material, quantity required for the batch and the current unit price.
Ensure that you also include your estimated labor time and cost, as it’s important to ensure that you have enough margin to cover your own time and energy to create your products.
If you have products with multiple variants (e.g., size, color), create a separate bill of materials for each variant as you may be surprised as to how your margins differ with small material changes.
Update your bill of materials regularly as prices change and new suppliers are added or removed. If you are using a spreadsheet, make sure you are creating formulae to make this job easier.
Tip: Craftybase is an inventory application that allows handmade sellers to create complete and highly accurate bill of materials for their handmade products, including pricing guidance, margin calculations and internal labor costs.
Along with your inventory, your material costs are automatically calculated in real-time to show you up-to-the-minute pricing guidance for all of your products.
Creating bill of materials lists for your handmade products is an essential step in creating an Etsy business that scales. By keeping track of the raw materials and components that you need, you can save time and money in the long run.