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Last week we talked about the importance of getting a handle on business expenses in general. If you joined in the process and also found a few expenses that aren’t really necessities, we’re on track together today! Now we’re going to go to the next level of expenses examination and get into the nitty gritty: mapping out our Cost of Goods Sold or CoGS. It’s important to look at these numbers alongside our operating expenses because both of these affect what prices we need to charge for our goods or services (and stay afloat as a business!).
Once we find our numbers for both — and note the prices we need to charge to be in a good place for growth — it’s critical that we do some research to see what the average prices are for similar goods and what online reviews and social shares say about the quality of the products or services. Others with similar products may have lower prices than you do, but is the quality on par with yours? And if not (as far as you can tell), how can you get the message out about the high quality of your pieces?
First let’s take a look at some examples of CoGS versus Operating Expenses. Below are some examples.
The examples above may or may not apply to you and your business, but they give you a good idea of the types of expenses that fall into the CoGS and Operating Expenses categories. As a rule of thumb, if you want to know if an expense falls under CoGS, ask this question: Would this expense have been an expense even if no sales were generated?
With a workspace full of goods, the cost of goods sold includes all of the money spent to create the goods and bring them to the “warehouse.” The operating expenses, on the other hand, represent the other day-to-day expenses necessary to keep the business running. If you are making (or servicing) what you are selling yourself, you need to include the money you pay yourself in the Cost of Goods Sold category. A lot of creatives don’t pay themselves until their business takes off or until then can afford to. If you do this, keep track of what you would pay yourself (or someone else) to make or service the product you’re selling.
Being aware of this “paying yourself” cost is important as you tweak your pricing. If the custom pillows you make cost you $10 in materials and you’ve priced a pillow at $20, when you add in the cost of your time to actually make the pillow, you may find that you’re actually losing money. For example if the pillow takes you 3 hours to make and you want to make at least $10 per hour, you’re in the hole because your compensation would be $30 and the cost of your materials are $10. That means your pillow price point should be at least $40 plus your monthly (operating) expenses and whatever dollar amount you want to put in the bank besides your $10 per hour rate.
Unless you want to have way too many scratch pads and notes on your desk, viewing all of this type of information is best done within an accounting software program like Quickbooks that automatically generates reports and has a platform specifically for the self-employed. Once you input your numbers, label your accounts and categorize your income and expenses you’re ready to take advantage of valuable reports that we’ll touch on below.
Some people resist software tools like these because they can seem overwhelming or time consuming, but the time it takes to learn and set them up is time is extremely well spent. It’s so important to commit to that process because it will help you come to terms with the true status of your business as it is. Most issues can be worked out with some tweaks here and there or coming up with new schedules for product launches. If you don’t have that bird’s-eye view that comes with setting up your own accounting system, financial issues can often reveal themselves too late in the game. And no one wants to lose a business because of issues that could have been course-corrected if caught earlier on.
Getting familiar with consulting reports in accounting software for the self-employed is actually a good time if you remain objective. Reports generated in Quickbooks, for example, have the ability to narrow down information for each question you need to answer to maximize your business’ success. And if you’re a visual learner, you’ll love the simplicity of the graphics Quickbooks provides. And the more often that you use and get comfortable with these financial reports, the easier it will be to see them as what they are: an impersonal map of information that will help guide you toward the decisions you need to make for your business. It took me a long time to stop being afraid of financial reports and stop seeing them as a reflection of me personally, but the more time I spent looking them over, the easier it was to think about them as a helpful business tool and not a personal report card.
I tend to save the big picture financial reports like the Profit and Loss Statement and Balance Sheet reviews until I’ve become comfortable with specific reports that create that big picture. The reason is simple: I like to have as much detailed information about my income and expenses as I can so that when I look at the big picture reports, I have an idea of why it looks the way it does and if there are any huge surprises. It also gives me the opportunity to have on-the-spot insights about what I can tweak to get that profit level where I’d like it to be.
We’ll be back for one more post to talk about setting some sales goals now that you have some really good knowledge that can support some “future plans” thinking. Even if that future thinking isn’t all about growth, it will lay the foundation for a solid future that can help you grow or simply specialize!
This post is sponsored by Intuit Quickbooks. All words, opinions and images are our own. Thanks for supporting our sponsors, like Quickbooks, that help us bring you free, original content every weekday!
