What is your COGS?
By Sarah Wallypop
Any business owner selling a product or service needs to first determine how much it costs them to provide that good or service. Many WAHMs do not realize the importance of knowing their cost of goods sold (COGS), but it’s impossible to tell whether you’re making money without this information! I'm sure there are as many ways of determining COGS as there are WAHMs. I'm going to describe here how I determine my COGS for a business in which I sew and sell diapers and slings. The process would be slightly different for a WAHM who buys things for resale (such as a Happy Heinys retailer), but the basic idea is the same. I use a 10-page spreadsheet with all sorts of formulas to automatically determine my COGS with a little input from me, but it doesn't need to be that complex. You can even do the figuring by hand if you prefer.
To be clear, I am using completely made up numbers in this article.
1) List all of the ingredients that go into a particular product. For a fitted diaper, for example, I'd list flannel for the outer and inner layers, sherpa for the soaker pad, elastic, touchtape, and thread. For a wipe, I'd list flannel, knit terry, and thread.
2) Determine how much of each "ingredient" goes into one item. This can be tricky. I find it easiest to measure linear items like thread, elastic, and touchtape. (I actually measure the touchtape, but I estimate on the thread.) For fabric, I have found it easiest to actually lay out a yard of the material and determine how many diapers I can cut from one yard. Let's say that I can cut 4 diapers from one yard of flannel, so I would say that each diaper uses 1/4 yard of fabric.
3) Determine the cost of each "ingredient." I actually keep detailed records of each purchase I make so I can make sure I'm using accurate figures. I include here both the price of the actual fabric (or elastic or whatever) plus the cost of any shipping I incurred to get the fabric to me. For example, if I bought a yard of PUL for $5, and it cost $2 to ship, I figure that that yard of PUL cost me $7.
4) Multiply the cost of the ingredient, as determined in step 3, with the amount used, determined in step 2.
5) Add up the cost of all the ingredients! But you’re not done yet…
6) List the other expenses you have as part of your business. There’s the cost of running your website, perhaps a monthly fee to stamps.com or your credit card processor, PayPal fees, and paper and pens and ink for your printer. If you sew, you’ve got expenses associated with maintaining your machine. Do you hire a nanny or use daycare for your children? All of these costs should be figured into your COGS.
There are several ways to achieve this. A very simple way is to add up all of the expenses that you incur over a three-month period, and add up the number of items you sold during that same three-month period. Divide the items sold by the expenses incurred, and you will have an estimate of overhead expenses per item. (If I had $300 in overhead expenses and sold 600 items, each item cost me approx. $.50 in overhead.)
A slightly more complex, but also slightly more accurate, way to figure your overhead costs per item is to add up the expenses over a 3-month period, and add up your total sales (in dollars) for that same three months. Divide as above, and you will have an estimate of the overhead expenses per dollar sold. (If I had $300 in overhead expenses and had $1200 in sales, each dollar of sales cost me approx. $.25 in overhead.)
7) If you want to get very detailed, you may add in portions of other expenses such as income taxes, electricity, light bulbs, and other expenses that are probably currently included in your household budget.
8) Last, don’t forget to add in your time!! How much are you worth? Besides determining how much you want to pay yourself per hour, you should also determine how much time each item costs. WAHMs who sew tend to only figure in the amount of time spent cutting and sewing, but don’t forget about the time it takes to process orders, update your website, maintain your inventory, and promote and market your business. You can estimate the costs using the methods for estimating overhead in step 6.
9) Add up all of these expenses, and you will have a good estimate of how much each item costs you.
10) What now? Knowing your cost of goods sold is just the start. COGS is an excellent tool that can help you:
- Determine your break even point (how many items you must sell each month to pay your monthly expenses)
- Determine your retail price using one of the several commonly-accepted methods for retail pricing.
- Determine wholesale pricing that still offers you a profit.
EXAMPLE:
Materials used in Fitted Diaper:
¼ yard of flannel for body x avg cost of 1.08 per yard = .27
¼ yard of sherpa for soaker x avg cost of 5.28 per yard = 1.32
¼ yard of elastic x avg cost of .20 per yard = .05
3 yards of thread x avg cost of .02 per yard = .06
¼ yard of loop touchtape x avg cost of 2.50 per yard = .625
1/8 yard of hook touchtape x avg cost of 2.50 per yard = .063
Total avg cost of fitted diaper materials = 2.388
Overhead expenses incurred January-March 2005:
PayPal Fees: $35
Credit Card Machine fees: $50
Stamps.com fees: $50
Nanny: $200
Sewing machine maintainence: $30 (a $60 tune up that will last for 6 months)
Total overhead expenses: $365
Number of Items sold January-March 2005: 500
Overhead expenses per item sold: $.73
Estimate of Time:
1 hour cutting and sewing per diaper
.5 hour other activities per diaper
Total – 1.5 hours per diaper
I want to pay myself $5 per hour. $5 x 1.5 = $7.50
Total cost per fitted diaper:
2.388 Materials + .73 Overhead + 7.50 Time = 10.618
Once you have determined what the cost of goods sold is, you need to decide upon a retail mark-up to determine your retail price. (Another tip from the trenches will be addressing this issue soon.)
Any business owner selling a product or service needs to first determine how much it costs them to provide that good or service. Many WAHMs do not realize the importance of knowing their cost of goods sold (COGS), but it’s impossible to tell whether you’re making money without this information! I'm sure there are as many ways of determining COGS as there are WAHMs. I'm going to describe here how I determine my COGS for a business in which I sew and sell diapers and slings. The process would be slightly different for a WAHM who buys things for resale (such as a Happy Heinys retailer), but the basic idea is the same. I use a 10-page spreadsheet with all sorts of formulas to automatically determine my COGS with a little input from me, but it doesn't need to be that complex. You can even do the figuring by hand if you prefer.
To be clear, I am using completely made up numbers in this article.
1) List all of the ingredients that go into a particular product. For a fitted diaper, for example, I'd list flannel for the outer and inner layers, sherpa for the soaker pad, elastic, touchtape, and thread. For a wipe, I'd list flannel, knit terry, and thread.
2) Determine how much of each "ingredient" goes into one item. This can be tricky. I find it easiest to measure linear items like thread, elastic, and touchtape. (I actually measure the touchtape, but I estimate on the thread.) For fabric, I have found it easiest to actually lay out a yard of the material and determine how many diapers I can cut from one yard. Let's say that I can cut 4 diapers from one yard of flannel, so I would say that each diaper uses 1/4 yard of fabric.
3) Determine the cost of each "ingredient." I actually keep detailed records of each purchase I make so I can make sure I'm using accurate figures. I include here both the price of the actual fabric (or elastic or whatever) plus the cost of any shipping I incurred to get the fabric to me. For example, if I bought a yard of PUL for $5, and it cost $2 to ship, I figure that that yard of PUL cost me $7.
4) Multiply the cost of the ingredient, as determined in step 3, with the amount used, determined in step 2.
5) Add up the cost of all the ingredients! But you’re not done yet…
6) List the other expenses you have as part of your business. There’s the cost of running your website, perhaps a monthly fee to stamps.com or your credit card processor, PayPal fees, and paper and pens and ink for your printer. If you sew, you’ve got expenses associated with maintaining your machine. Do you hire a nanny or use daycare for your children? All of these costs should be figured into your COGS.
There are several ways to achieve this. A very simple way is to add up all of the expenses that you incur over a three-month period, and add up the number of items you sold during that same three-month period. Divide the items sold by the expenses incurred, and you will have an estimate of overhead expenses per item. (If I had $300 in overhead expenses and sold 600 items, each item cost me approx. $.50 in overhead.)
A slightly more complex, but also slightly more accurate, way to figure your overhead costs per item is to add up the expenses over a 3-month period, and add up your total sales (in dollars) for that same three months. Divide as above, and you will have an estimate of the overhead expenses per dollar sold. (If I had $300 in overhead expenses and had $1200 in sales, each dollar of sales cost me approx. $.25 in overhead.)
7) If you want to get very detailed, you may add in portions of other expenses such as income taxes, electricity, light bulbs, and other expenses that are probably currently included in your household budget.
8) Last, don’t forget to add in your time!! How much are you worth? Besides determining how much you want to pay yourself per hour, you should also determine how much time each item costs. WAHMs who sew tend to only figure in the amount of time spent cutting and sewing, but don’t forget about the time it takes to process orders, update your website, maintain your inventory, and promote and market your business. You can estimate the costs using the methods for estimating overhead in step 6.
9) Add up all of these expenses, and you will have a good estimate of how much each item costs you.
10) What now? Knowing your cost of goods sold is just the start. COGS is an excellent tool that can help you:
- Determine your break even point (how many items you must sell each month to pay your monthly expenses)
- Determine your retail price using one of the several commonly-accepted methods for retail pricing.
- Determine wholesale pricing that still offers you a profit.
EXAMPLE:
Materials used in Fitted Diaper:
¼ yard of flannel for body x avg cost of 1.08 per yard = .27
¼ yard of sherpa for soaker x avg cost of 5.28 per yard = 1.32
¼ yard of elastic x avg cost of .20 per yard = .05
3 yards of thread x avg cost of .02 per yard = .06
¼ yard of loop touchtape x avg cost of 2.50 per yard = .625
1/8 yard of hook touchtape x avg cost of 2.50 per yard = .063
Total avg cost of fitted diaper materials = 2.388
Overhead expenses incurred January-March 2005:
PayPal Fees: $35
Credit Card Machine fees: $50
Stamps.com fees: $50
Nanny: $200
Sewing machine maintainence: $30 (a $60 tune up that will last for 6 months)
Total overhead expenses: $365
Number of Items sold January-March 2005: 500
Overhead expenses per item sold: $.73
Estimate of Time:
1 hour cutting and sewing per diaper
.5 hour other activities per diaper
Total – 1.5 hours per diaper
I want to pay myself $5 per hour. $5 x 1.5 = $7.50
Total cost per fitted diaper:
2.388 Materials + .73 Overhead + 7.50 Time = 10.618
Once you have determined what the cost of goods sold is, you need to decide upon a retail mark-up to determine your retail price. (Another tip from the trenches will be addressing this issue soon.)
