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