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.
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