Cost of Goods Sold

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.         

When Clarity meets Focus

Tony Robbins talks (repeatedly) about being “in state” and the rituals that support getting there.  The whole purpose of course around being “in state” is to create the mindset that supports the work that’s needed for you to create your desired outcome. 

Just recently my friend sent me a Tony Robbins link that made me think of my own ritualistic habits that create an energetic state of mind for the work ahead. 

Thinking of the work ahead brought up the importance of staying really clear with regards to what I want to create and what I want to convey.  That’s the bull’s-eye for me; remembering what I want to create today, tomorrow; five years from today or tomorrow.          

Which brings me to Made to Stick written by Chip Heath and his brother Dan. Published about five years ago it remains one of my favorite business books because its discussions and theories are fresh, creative, logical and useful. 

The brother discuss a  concept that has helped me save time, money and continues to keep me on target when my mind strays into that dangerous territory of monkey mind.   

If you have the book I urge you to reread Chapter 1 and then integrate it into your life.  If you don’t have the book here’s a quick summary.  It’s all about a notion called Commander’s Intent (CI).

According to the authors, Commander’s Intent is a military term that is a “crisp, plain-talk statement.”  You arrive at this intent by asking yourself two simple, but focused questions:

If we do nothing else during tomorrow’s mission, we must _____________________.

The single most important thing that we must do tomorrow is _____________________. 

It’s all about taking the time to find the essential kernel of your idea to communicate the message and make it memorable. 

But for me it’s even more powerful.  When I’m that clear of purpose, when I live my Commander’s Intent, when I’m not acting from any extraneous voices, I deliver and continue to make quick progress toward growing my business to increased profitability while maintaining flexibility and fun.                 

        

Backwards 

I have a start-up business that’s all about cocoa.   And like most start-ups we’re (we’re a team of three) all over the place as we attempt to find the model for the business. 

Under the best of circumstances businesses are started because the entrepreneur witnesses a problem or identifies a perceived need in the marketplace.  With creativity the entrepreneur brings solution to that problem by introducing a new product or service. 

I don’t know the percentage of businesses that start with the above mentioned “problem, solution equation” but my guess is most do not start this way at all. 

Instead a large percentage of us come at business ownership from an entirely different direction; passion. We have a hobby (making jewelry,) or specific training (web design,) and excitedly decide to start a business because a friend mentioned our jewelry was pretty, our web design creative. Once the business cards have been developed and the website is live we start looking around for customers.   Did anybody tell us they needed more jewelry or a new website?? 

It’s a dangerous trap (and oftentimes a costly one too) but that trap was our cup of cocoa. 

Conceding to all that we fell victim to our own foodie passion, the good news in this story is that my partners and I have been in business long enough to know that is it not prudent to execute (AKA:  spend lots of money) on a product idea that doesn't have a business model. 

And there’s even more good news.  After more Saturday afternoons that I care to count we gave our cocoa a name (Cocoa Project) and a model.  See the results of our effort at  cocoa projects

   

It’s never too late

For years I've lived in a very friendly, very comfortable apartment complex in West Austin. One of my nearby neighbors is self-employed with a schedule similar to mine which has us bumping into each other regularly.      

All of this community connection is warm and wonderful.  There’s just one problem – I can't remember his name.  So, often times I greet him with a huge smile and a, “hi neighbor!”  He responds, “hi Penny.”  And off we go.

I call it the Closed Window Syndrome.  We've been neighbors far too long for me to ask his name -and of course he or one of my other neighbors has told me his name a million times – I just can't seem to remember it.  It’s just too shameful – too much time has passed – I would feel rude and uncaring to ask.  In other words my window of opportunity has flown away and so he remains, “hi neighbor.”    

I'm sure you've been there.  You've been in situations when it feels too embarrassing to admit that the information that should be right at your fingertips can't be found in your memory bank.  Or maybe information has been given to you in the past but you're still in confusion. 

Sometimes it’s not such a big deal – I mean in this case nobody is going to cart me off to bad-neighbor jail.  But this problem can have serious consequences. 

Through my experience coaching tons of entrepreneurs I know many, many have the “I-don't-know-what-the-hell-I'm-doing” secret - sadly living life in the confines of the Closed Window room. 

If you've been in business for a couple of years or longer and have trouble reading your financial statements or creating marketing objectives or having conversation regarding pricing platforms or profitability models and  feel too embarrassed to ask because you've been in business “too long” you may be living in the oxygen-depleted Closed Window room.  Sadly the room is probably crowded. 

To continue the metaphor and get you breathing again, I say boldly open that window, shake off the shame and declare that small business by its very nature is about long term learning.  Pretending you know what you don't know is exhausting and is a road to nowhere.         

Decide today there is no such thing as “being in business too long” to ask small business questions.  And no environment to intimidating to act as if you understand something that you don’t.  

The same courage that took you out on a ledge to open your business is the same energy that can bring you into the room of understanding and possibly change unawareness into enlightenment.

And my experience says that enlightenment oftentimes leads happily to increased profitability.      

                      

Welcome to Margin

On a rainy Monday morning over cups of hot cocoa I recently had the pleasure of meeting with Karen Ranus, Director of Volunteer Services and Community Outreach at Saint Louise House in Austin. 

Saint LouiseHouse helps single mothers and their children overcome homelessness by providing a stable environment and supportive services. 

One comment Karen made truly struck me. She said that when we picture homelessness we picture single men.  It’s because we see them time and again on the street; Men holding “I will work for food” signs. 

But in truth this is not the largest population of homelessness in Austin (the US?)  As it turns out the largest population of homelessness is single women with children.  These are the ones without a warm place to sleep every night. 

What my conversation at Saint Louise House had me ponder was perception.   

Just like men seem to be the face of homelessness, extremely successful entrepreneurs seem to be the face of small business.

Online, in magazines and books, on television, while networking or listening to a keynote address we’re introduced to these crazy successful entrepreneurs.  And often times they’ve created this success in a very short period of time. 

I’ve been in small business for over 20 years first owning bakeries (which I sold in 2005) and then this consultancy.  In between I counseled entrepreneurs through a local non-profit for close to 7 years.  

My experience seems to match the current statistical information – and that picture is that small business still fails at a very high rate or underperforms projected revenue.       

I started this consultancy because I wanted to make a difference in this picture – especially for sole proprietors and small LLC’s.   I want the perception to become the reality.   I want to make it less stressful and more fun by making the business more dependable and more profitable. I want to expand its capacity for greater contribution.

 I’ve seen the problems.  I’ve lived the problems of small business.  And I know the solutions.   

My mission to make it easier is called MARGIN.