You know that saying, it costs money to make money? Knowing how much it costs to run your business is important because you can get a better idea of how much it’s costing you to run your business - and maybe some profits you’re missing out on. Getting a pulse on your business’s finances starts with knowing what your cost of goods sold (COGS) is. Here’s a breakdown of what you should be doing to determine your COGS.
Always know your costs
You need to continuously analyze the impact of inflation on your key COGS components, such as raw materials, labor, transportation, and production costs. As prices fluctuate, so should your understanding of your costs. Make sure you monitor incoming invoices to see if prices have changed from your suppliers, and any other costs.
Know your supply guys
Build strong relationships with suppliers - this will help you negotiate better terms and prices. Loyalty can go a long way, as well as friendly working relationships. Make sure respect goes both ways, and you can possibly negotiate the best deal for both parties.
Manage your inventory efficiently
Avoid overstocking items, which deals with holding costs (and can lead to waste, especially if you deal with perishable goods!). Operating with a First In, First Out system can be one way in which to manage your inventory. Also, keep an eye on what is and isn’t selling at your business - maybe it’s time to take something off the menu or off the shelves!
Consider your pricing strategy
We know you don’t want to do it, but it might be time to carefully assess how much you can realistically increase prices without negatively affecting customer demand. And be transparent with your customers about why you’re increasing prices - you might get some complaints, but if you’re honest about why prices are going up, people will ultimately be fine with it.
Get your COGS in order for better operations and profit - and growth!
Your Cost of Goods Sold is one tool that can help you increase your business’s profitability. When your business is profitable and you want to grow, it might be time to consider how to fund your next step! Honeycomb Credit investment offerings allow you to grow your business with investments from your community - learn more by filling out the form below.
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To determine your small business's Cost of Goods Sold (COGS), start by calculating all the direct costs associated with producing or acquiring the goods you sell. This typically includes the cost of raw materials, labor, and manufacturing expenses. For example, if you’re selling coffee, you would add up the cost of sourcing the best organic coffee beans, packaging, and any labor costs related to preparing the product. Once you have all your direct costs, subtract them from your revenue to determine your gross profit. Keeping track of COGS helps ensure your pricing strategy is on point and can guide decisions to improve profitability. Always remember, choosing high-quality inputs like the best organic coffee beans can make a significant difference to…