Inventory is the largest investment for product-based businesses, which is why it’s important for business owners to have a firm grasp on how much it costs them to manufacture and sell their goods. As a business owner, it’s imperative you understand all costs associated with your product. It not only helps you budget and forecast appropriately, it’s the foundation from which prices and margins are created to make your business profitable.
Here are two things to remember about your cost of goods sold (COGS):
Don’t Leave Anything Out: If you are manufacturing your product, remember that your inventory includes more than just the final product. You must understand the cost of your labels, boxes, shipping, and anything else that factors into the finished good. Business owners have the tendency to overlook these details, but excluding these items from inventory counts will skew the final cost of the product. This error can cause you to make smaller margins than originally anticipated. The alternative would be to work with a turn-key co-packer that sources and pays for all raw materials, manufactures the product, and delivers you a finished product. Typically the finished good will cost more than if you sourced and paid for raw materials yourself, but outsourcing this function can be worth it in the early stages when your energies need to be on sales and business development.
Margins Are Everything: If you don’t know how much your product costs, how will you know what to sell it for? To make a profit, the business owner must know what goes into their product so they can charge appropriately and get the margin they need to make the business profitable. And remember, margins will likely vary by sales channel so by knowing the COGS, you’ll be able to assess margins by channel and maximize each sale.
Business owners aren’t expected to know everything about every facet of their business, but they should have a firm understanding of the costs associated with their product. If there’s any doubt or confusion, explore working with an outsourced accounting firm that will help you make sense of your cost of goods sold and inventory.