Tis the season to think turkey and table settings or trimming the tree.
Love, love, love all of that but I have to admit I quickly process the whole turkey thing while lingering on a critical business concept; Cost of Goods Sold (aka: COGS.)
|logo from my bakery days. . .|
I blame this whole COGS obsession on owning bakeries for so many years. Not understanding our COGS (especially when production was high during the holidays) could likely be the difference between making money or working for very little.
So here we go. If you’re a product-centered company, the direct cost attributable to the production of goods sold, is considered COGS. The direct cost usually includes four components:
ü Material cost
ü Labor cost
ü Packaging costs
ü Distribution cost
Notice the word DIRECT comes up a lot when having a COGS conversation. For instance COGS is not about your marketing expense – it is only direct costs. To determine COGS ask yourself, “could I create this product and take it to market without this cost?” If the answer is “no” then it is a direct cost and should be consider in your COGS equation.
Granted, this is basic business start-up information. However, I have talked to and advised tons of entrepreneurs both in my roll at BiGAUSTIN and with my business MARGIN.
My experience tells me that even veteran entrepreneurs – those in business for several years, do not calculate COGS correctly. And I totally get it – I was part of that group for years - so absolutely no judgment from me.
But it is important. Take the time to work the spreadsheets that will tell you what you spend for each donut, piece of jewelry, knitted sweater, etc., etc. you create for sale.
And btw are YOU making the donuts, jewelry, sweaters, etc.?? If so add YOU to the equation. And don’t make the mistake of telling yourself that you’re having so much fun you can wait to be paid and thereby omit the labor dollars in your equation. As soon as you have the flu and can’t produce the product, you’ll need to replace your labor with paid labor. Remember you’re building a business – so always count the labor dollars.
And just as another point of reference in our conversation on COGS there are two ways to look at COGS. One is from an inventory perspective, the other from a COSTING and PLANNING perspective. Our discussion today is all about costing and planning.
Here’s an article that might be helpful.