If you’ve read my book or articles you’ll know that I’m a big believer in being in tune with your COGS, or cost of goods sold hence the term, COGSnizance. So that exactly does it mean? To make sure we’re all on the same page, I’m defining COGS as all expenses in your business, in terms of percent of revenue, or at times, cents on the dollar. The point is profit, and the key question is: What are you spending to create profit? The thing that is important is understanding the impact of ALL of your expenses—not just some of them, and not just the major categories of expense.
Getting Up Close and Personal with Your COGs
So you need to get cozy with, and thoroughly cognizant of, your COGS. How do you do this? I always suggest that companies maintain a rolling three-year COGS report that tells you not just the actual numbers, but also the percentage of your revenue that you’re spending on every expense in your business—especially payroll COGS.
As I’ve told many an entrepreneur, having numbers gets you started, but it’s only part of the analysis that’s necessary. You also need the percentages—the relative weight of the COGS in one area of your business compared with the others you track. It provides you, as CEO, with what I consider to be the Big Picture for your operation.
Percentages Are What You Want
Tracking COGS allows you to simplify the monitoring of your costs and, better yet, to add a crucial forward focus to your decision making. That’s because COGS percentages allow you to make apples-to-apples comparisons of your business, regardless of the differences in revenue from year to year. It gives you a macro perspective on where you can spend more money and where you need to spend less to ensure consistent profit as revenue fluctuates. By focusing on COGS, you’re not lost on a trend line plotted with actual numbers. You’re looking at a constant percentage that you’ve set as a goal for each category of expenditure, and that makes it easy: you simply adjust your strategy as you see the percentage ebb or flow.
Watching your COGS percentages is like watching body temperature rise and fall as the immune system identifies and deals with threats: the higher the temp, the greater the struggle going on within. In this way, a slight rise in payroll COGS can be seen as an indicator that the company is responding to a stress of some kind—either new competition or a drop in sales, for example. But, like a fever, that spike has to come down quickly. The higher and the more sustained the rise in the COGS percentage, the sicker the company is likely to become. But you can avoid the illness altogether just by setting up your own COGS-nizance system, and it’s not difficult.
No matter your company’s situation – whether in a successful period or downturn – turning to COGS will be your answer to continued sustainability. Get more specific guidance on COGS and how to set up your COGS table, get a copy of my book, The Second Decision, available here.