As a handmade seller, one of the most important things you can do is to keep track of your costs of goods sold (COGS). This will not only help you to price your products correctly, but also to manage your inventory effectively and help you increase your profit margins.
In this blog post, we will discuss what COGS is, and how it can make a big impact your handmade business.
Along the way, we will also provide some quick and easy tips on how to reduce your COGS to improve your profit margins.
What is COGS?
COGS is short for “Cost of Goods Sold” and is a key metric for any business that manufactures or sells physical products (…this is you, handmade seller!).
So what is COGS? It’s basically a tally of the actual cost to produce your finished products.
Why is it important? By taking the time to calculate and understand your COGS, you can identify ways to reduce your costs and thus increase your profit margins. More profits left over at the end of the day means more money in your pocket, and more opportunities to expand your business.
How COGS can help you price your handmade products better
Determining the right price for your product can be a tricky balance. You want to ensure that you’re making a profit, but you also don’t want to price yourself out of the market. One way to help strike this balance is to use your cost of goods sold (COGS) as a guide.
As we’ve discussed, COGS includes all the direct costs associated with producing your product, such as materials, labor, and shipping. By knowing your COGS, you can get a good sense of how much it costs you to produce each unit of your product.
From here, you can add on a markup that will cover your other expenses and generate a profit.
Of course, there are other factors to consider when pricing your product, but using COGS as a starting point can help you make sure that your prices are both fair and profitable.
How to calculate your COGS
For handmade sellers, COGS can be a bit trickier to calculate than for mass-produced goods. This is because each item is usually unique and may require different materials, supplies, and time to create.
As a general guide, to calculate your COGS you’ll want to add up the cost of all the raw materials used to make your product. This includes things like fabric, thread, trims, and so on. Your list of raw materials is often termed your “Bill of Materials (BoM)”
It’s important to ensure that you also factor in your internal time to produce the item if you are calculating your COGS in order to make pricing and margin decisions (if you don’t, you are effectively working for free which does not make for a sustainable business!).
If you are using your COGS figure for your tax returns, you’ll want to ensure that you do not include the costs of internal labor (as this cannot be directly claimed in this way). COGS for your IRS Schedule C is best calculated using a total inventory value method, rather than a simple COGS calculation as discussed here.
How can I track my COGS?
Handmade sellers have a few different options when it comes to software that can help them track their COGS. One option is to use a spreadsheet, such as Microsoft Excel or Google Sheets. This method can be simple and straightforward, but it requires the seller to input all of the data manually. If your costs change for one or more of your materials, then you’ll need to recalculate pretty much everything all over again - which can be quite a time sink.
Another option is to use dedicated COGS tracking software, such as Craftybase. These programs automate much of the data entry process and generally offer more features than a spreadsheet, such as the ability to track inventory levels, generate real time pricing guidance and generate reports.
Ultimately, the best option for tracking COGS will depend on the needs of the individual seller however it is important to choose a solution that will grow with your handmade business.
COGS vs COGM
Another acroynm often used in manufacturing circles is “COGM”. So, what is COGM and how does it differ to COGS?
The cost of goods manufactured (COGM) is a figure that represents the total cost of producing your finished goods. This includes the cost of raw materials, labor, and overhead expenses.
In contrast, the cost of goods sold (COGS) only includes the cost of raw materials and labor. It does not include overhead costs. COGM is often used as a measure of profitability because it provides a more accurate picture of the true costs associated with production.
However, it is important to keep in mind that COGM can also fluctuate from period to period, depending on the mix of products being manufactured.
As a result, COGM should not be used in isolation when making decisions about pricing or production levels.
Quick tips on how to reduce your material costs
Minimizing your costs is essential for maximizing profits. There are a few quick ways to do this:
Shop around for the best prices on materials. You may be able to find cheaper options if you take the time to compare prices.
See if you can get discounts from suppliers. Many suppliers offer discounts for bulk orders.
Use coupons and promo codes whenever possible. This can help you save money on both materials and shipping costs.
Buy only what you need, based on your projected sales. Too much material stock ties up money that would be better spent growing your business.
By understanding your COGS and taking steps to minimize your costs, you can ensure that your handmade business is profitable.
Tracking your COGS using software like Craftybase will also give you a better understanding of your business finances and help you to run your handmade business more effectively.