Your shop policies say a lot about your store and you as a business person. When I first opened my Etsy shop and set up my shop policies, I thought to myself, "What would I expect as a customer?"
I'd want to know that if a package gets lost in the mail, it will be replaced or my money refunded. I'd also like to know that if I buy something that doesn't fit, the seller will make it right for me. A seller who offers an awesome exchange / return policy shows that they are confident in their work. And, let's face it, it is impossible to always sew something that fits perfectly the first time every time. Being prepared for when things don't go as planned will help you deal with the issue with grace and calmness. Returns, lost items, etc, are all a part of doing business.
As you grow, it is important that you continually update your shop policies. When I first started, I could get an order out in a few weeks. Now that business is more steady, it takes me some time, but it is important that your customer clearly understand the nature of your turn around before hand.
Writing shop policies is actually pretty easy. We all know what we expect as customers. If you are unsure of what to write, check out other shop's Policies Pages for inspiration (but do not copy). Etsy makes it really, really easy.
Once you have your shop policies written, the second part, which can be the more challenging part, is living up to them. It's no fun dealing with a customer who has a package that's been lost in the mail, it's disappointing and frustrating! But, the faster you deal with issues, and more prepared you are, the happier your customer will be.