Well hello there and Happy Monday! I hope you had an amazing weekend. Welcome to another read on the The Keys. It’s your favorite Money Motivator – Growth Instigator, Erica Fields bringing you the keys to your financial house!!
Financial reports paint a picture of how well a business is performing, if they have room for growth, and when they should reduce spending to keep the doors open when sales are low. The most important one up for discussion is often the Income Statement, also referred to as a Profit and Loss. This report displays the income and expenses for a certain period and allows decision makers the opportunity to assess if a company is profitable or operating at a loss. Analyzers will be interested in the revenue but more so want to see how much is spent on Cost of Goods Sold (COGS) and expense. Wait there’s a difference? You bet your bottom dollar there is.
Cost of Goods Sold
Cost of goods (or services) sold is a common accounting term that describes a certain type of expenses incurred by a business. Think of it as the cost associated with producing products or services for sale. If you own a widget company, you may require labor materials and energy to product your sale items. These costs can be directly related to production and would not be necessary if you had no widgets to produce.
Aside from direct costs, a business will also have what is referred to as overhead expenses, or general and administrative. They are incurred in, and support, the business, but are not directly related to production. In the same example above, the widget maker has a receptionist, bookkeeper, and rent for space to seat them. These expenses are still as important as COGS but are required regardless if production is taking place or not. And their costs would be more stable month-to-month and are more predictable and less dependent on production.
During the pricing stages of planning your business product or services, you will want to consider both your cost of goods sold (direct costs) and overhead expenses (indirect costs) and how much revenue is needed to sustain both. Direct costs will be affected by the product numbers you plan. The more you reproduce, the higher these costs will be. Get with your financial specialist to understand how to better plan for these costs and to identify how much of a cash reserve is needed to keep you afloat each month.