Business Plan for Small Business - Cost of Goods and Margins
What the heck is cost of goods sold? It is a cost that is triggered by a sale.
Rent is an expense you incur no matter whether you sell anything during the month or not.
A Cost of Goods Sold expense only is triggered by the sale of a product.
Let's say you are in the confectionery business and you own a convenience store.
When you sell a candy bar, the money you receive from the customer has to cover the cost of that candy bar that you purchased from your wholesaler.
The sale of that candy bar triggers a cost.
Got it? Now, I want to explain the difference between cost and margin.
This is very basic to business and most entrepreneurs couldn't explain it to you.
They use the terms but have no idea what they really mean.
Take the candy bar.
Let's say you buy a candy bar for 25 cents and sell it for one dollar.
Watch this: Cost of Goods Sold = Cost price divided by sale price stated as a percent OR $.
25 / $1.
00 X 100% = 25% Now let's say the price of chocolate skyrockets and the wholesaler has to raise his prices.
He now charges 40 cents for the same candy bar.
$.
40 / $1.
00 X 100% = 40% Your cost of goods sold for that item in your store just went up from 25% to 40%.
Ouch.
Now you have less money every time you sell that candy bar.
To maintain a 25% cost you have to sell the candy bar for $1.
60.
$.
40 / $1.
60 X 100% = 25% Margin = Sale price minus cost price stated as a dollar figure OR $1.
00 - $.
25 = $.
75 So costs are presented in percentages and margins in dollars.
What is of more importance to you - margin, right? You are interested in dollars.
I can have a cost of 0%.
How? I won't sell anything.
You will have a cost of goods sold for each item you are selling.
Class dismissed.
I know some of this a little dry but you have to understand it.
If you don't understand costs and margins then you will fail.
Costs and margins drive your small business and your profits.
Rent is an expense you incur no matter whether you sell anything during the month or not.
A Cost of Goods Sold expense only is triggered by the sale of a product.
Let's say you are in the confectionery business and you own a convenience store.
When you sell a candy bar, the money you receive from the customer has to cover the cost of that candy bar that you purchased from your wholesaler.
The sale of that candy bar triggers a cost.
Got it? Now, I want to explain the difference between cost and margin.
This is very basic to business and most entrepreneurs couldn't explain it to you.
They use the terms but have no idea what they really mean.
Take the candy bar.
Let's say you buy a candy bar for 25 cents and sell it for one dollar.
Watch this: Cost of Goods Sold = Cost price divided by sale price stated as a percent OR $.
25 / $1.
00 X 100% = 25% Now let's say the price of chocolate skyrockets and the wholesaler has to raise his prices.
He now charges 40 cents for the same candy bar.
$.
40 / $1.
00 X 100% = 40% Your cost of goods sold for that item in your store just went up from 25% to 40%.
Ouch.
Now you have less money every time you sell that candy bar.
To maintain a 25% cost you have to sell the candy bar for $1.
60.
$.
40 / $1.
60 X 100% = 25% Margin = Sale price minus cost price stated as a dollar figure OR $1.
00 - $.
25 = $.
75 So costs are presented in percentages and margins in dollars.
What is of more importance to you - margin, right? You are interested in dollars.
I can have a cost of 0%.
How? I won't sell anything.
You will have a cost of goods sold for each item you are selling.
- Candy Bars 25%
- Cigarettes 75%
- Soda Pop 50%
Class dismissed.
I know some of this a little dry but you have to understand it.
If you don't understand costs and margins then you will fail.
Costs and margins drive your small business and your profits.
Source...