There are some things that every small business owner should be
tracking; income, expenses, and profit are three of these things. To
figure out which direction will be most successful for your business,
you need to break it down even further—you also need to look at the
profit margins for each product or service that you provide.
Overall profit margin for your business is an excellent measurement,
and one you should look at regularly, but it is a very big-picture
measurement. As a small business owner, you have a limited amount of
time each day, and a limited amount of money—you need to know that you
are putting your time and money into the products that are giving you
the best return.
The best thing you can do to determine what your highest profit
products or services are, is to determine your Cost of Goods Sold, or
COGS. Here’s a brief introduction to the concept of Cost of Goods Sold and profit margins.
There are many small business owners who have done a comprehensive
COGS measurement on their products and services and been quite surprised
by the results. That big-ticket item that you think is making you all
the money might actually cost you so much to produce that a smaller,
more easily sold item could be producing a greater profit. These are the
kinds of things that you need to KNOW, not guess, about your business.
As noted by the Corporate Finance Institute,
“Cost of goods sold consists of all the costs associated with producing
the goods or providing the services offered by the company. For goods,
these costs may include the variable costs involved in manufacturing
products, such as raw materials and labor. They may also include fixed
costs, such as factory overhead, storage costs, and depending on the
relevant accounting policies, sometimes depreciation expense.”
The process for finding out this information about your business is
not hard. Like most accounting practices, it just takes keeping good
records about your business, and running reports to check on the state
of things. The kinds of information you will need for your COGS reports
is unique to each business, and something that Shaw & Associates
would love to develop with you.
Contact Shaw &
Associates Chartered Accountants for accounting help you can count on.
One complimentary meeting with us will put you and your business on a
more profitable and positive path.