Why do I need to track Cost of Goods Sold and WHAT exactly is it? Understanding what Cost of Goods Sold is and WHY it’s important to track it is certainly a confusing thing for most handmade and creative business owners. Let’s see if we can clear that up.
Now we’re going focus on the flip side and talk about why you need to track Cost of Goods Sold (this week) and when and how inventory hits Cost of Goods Sold on your Profit and Loss Report and how all of this hits your tax return (next week).
In broad terms, Cost of Goods Sold is literally what it cost you to make the finished item(s)s that you sold today, this week, month, or this year.
But there’s more to it than that, because we must narrow down our focus to a what it costs to MAKE each specific item. Maybe it really makes more sense to you to call it “Cost to Make”.
Now that’s the key, what it costs to make each specific item, and I’m a firm believer of keeping track of what it cost me to MAKE each item that I sell.
It’s important to know what it cost you to make an item so you can determine a good sales price. When you think of it this way, you end up being sure that your business is really covering your costs, making a profit, and leaving some money left over so that you can pay yourself and reinvest in your business to keep it running.
This puts a whole new light on things doesn’t it?
If you think of inventory and cost to make as a husband and wife team – each with their own strengths or in this case requirements – your business is the marriage and then Cost of Goods Sold is the result of that union.
If you’re only doing calculations at the end of the year in some haphazard manner and not keeping track of things as they happen, then you don’t have all of this really helpful extra information to help you make sure that your pricing includes a profit.
So, this is kind of the flow of things
- you buy something
- you calculate how much it cost you (the actual price you paid for the materials plus any shipping or sales tax – (see the Notes section at the bottom of last week’s post). This goes into the Inventory black hole on your Balance Sheet and increases its value.
- You figure out how much you bought and how you sell it – you determine a unit of measure that makes the most sense to you.
- So, if you buy yarn – you would buy it by the skein and maybe sell it by the yard.
- Maybe you buy child safe eyes you probably buy them by the package and sell them by the pair.
- Each thing that you buy could have a different unit of measure. When this happens, you would choose a unit of measure for each type of supply that you purchase and keep on hand and you’d want to be consistent in the way that you price it out.
This is important…….
If you got that item on sale, you also need to know and keep track of what the regular retail price of that item is – plus any shipping or sales tax. So, you’ll need to determine the sale price based on your unit of measure in order to price your item to sell.
Some people like to use spreadsheets – but I prefer software and if you want to know why, watch the replay of my free 90-minute webinar “Thinking of ditching the spreadsheets and using (QuickBooks) software for your bookkeeping needs”.
You’re probably thinking…
Holy crapsters, does this woman think we have nothing better to do than deal with numbers all the time?
Look I get it there’s only so many hours in a day. I also know that there are many of you they hate this whole bookkeeping and numbers thing.
But here’s the thing.
- You started a business to make money, right?
- Bookkeeping and number crunching is a necessary evil when you own a business
- You need to know what it cost you to make an item.
- And, you need to know how to price that item in order for your business to make a profit.
- If you keep materials and supplies on hand, you have inventory.
I know that sounds super harsh, but it’s just the way it is.
So, the next time you start a project, grab a piece of paper, create an Excel spreadsheet, or sign up for my newsletter and receive my Project Cost & Pricing Worksheet and start keeping track of:
- All the materials that go into the making of that project – their cost and retail prices.
- How much time it took you to make the project.
- Determine what you want to sell that item for.
Make sure that piece of paper is 100% complete before you wash, block, and pack that item into storage for an upcoming craft fair or until it’s sold. You may grumble now – but you’ll thank me for it later, because these numbers are important!