Concepts To Master When Starting Or Growing A Business

Cost Of Goods (COGs) – What It Is And What It Isn’t

Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses, such as distribution costs and sales force costs.


Includes:

  • Product Material / Ingredients
  • Packaging / Labeling
  • Shipping From Manufacturer To Your Warehouse
  • Product Testing / Certification If By Batch

Does Not Include:

  • Overhead Costs
  • Marketing / Advertising
  • Shipping Costs To Wholesalers / Distributors

 

Customer Acquisition Costs - CAC

Customer acquisition cost is the best approximation of the total cost of acquiring a new customer. It should generally include things like: advertising costs, the salary of your marketers, the costs of your salespeople, etc., divided by the number of customers acquired.

 

Profit Margins – Are You Getting Enough?

You Can’t Raise Prices – You Have To Lower Costs

Retail Margins

Retail Price / COGs

 

Wholesale Margins

Wholesale Price / COGS

 

Distributor Margins

Distributor Price / COGS

ROI(Return On Investment) – Are You Making Money

In Your Business

Return on investment measures how effective your investments into your business are at generating income.


Whenever you invest money or time into your business, you need to have a goal result in mind and way to measure it to ensure you're making a profit. Calculating the return on investment is a way to measure whether a business decision is paying off.


Calculating ROI can also help you understand what's working and not working in your business so you can make changes. It's a way of asking, "What will I earn by investing this time and money into my business?"

With Your Marketing / Ads

Return on ad spend (ROAS) is a marketing metric that measures the amount of revenue earned for every dollar spent on advertising.

ROAS equals your total conversion value divided by your advertising costs. “Conversion value” measures the amount of revenue your business earns from a given conversion. If it costs you $20 in ad spend to sell one unit of a $100 product, your ROAS is 5—for each dollar you spend on advertising, you earn $5 back


Inventory – Cash Blackholes

# Of Skus Drives Inventory Levels And Costs

Increasing inventory can be a good thing in the case of fast-moving stock, but this very often is not the case. Instead, outdated, slow-moving SKUs often proliferate, which can cause a strain on the entire system.

Companies with too many SKUs will run out of physical space in storage centers, will have more difficulty working with stock, will spend more money finding, sorting, and shipping stock, will tie up capital in dead and obsolete stock, could have tax issues relating to the extra inventory, and even have issues with timely shipping and customer service.

Finally, a larger SKU inventory can create a strain on management, which can increase costs and decrease efficiency.


If your capital is tied up in obsolete inventory, have a large volume of that inventory, or the amount of inventory in your warehouse makes it difficult to appropriately sort and handle it, it is definitely time to reduce your inventory. Unchecked SKU growth can affect a great deal of costs, but the the following include some of the most common:
→ Storage Space (cost of leasing, percentage of storage utilized, length of time spent in warehouse, cost of labor, extra hours to sort through/around stock, storage media, equipment costs, etc)

→ Capital tied up in obsolete stock (percentage of capital that could be used towards a new investment)\

→ Labor used for management, warehouse management, picking, shipping, etc.

→ Packing, Shipping, etc.

→ Merchandising

→ Marketing

→ Website prominence

→ Management costs/time

Depending on what you are selling, and on the number of platforms you are selling on, your costs can vary a great deal. That's why it's important to understand SKU profitability, so that you can appropriately calculate costs and expenses.

Inventory Turn

What Is Inventory Turnover? Inventory turnover is a financial ratio showing how many times a company has sold and replaced inventory during a given period. A company can then divide the days in the period by the inventory turnover formula to calculate the days it takes to sell the inventory on hand.

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