Inventory Management, eCommerce

Calculating the real Cost of Goods Sold

BY Guest Contributor 26 Oct, "16

In this guest post, Dafina Smith of Sunny's Hair & Wigs tackles a tricky cost that any retailer should be aware of: the real Cost of Goods Sold. 

It’s a line item any retailer knows all too well…Costs of Goods Sold (CoGS). This number and the markup that we charge on it is usually the strongest indicator of whether we have a solid business model or a nice hobby.

I tend to look at this number as one cost: the quote given from my supplier or factory including shipping and freight.  I think because it’s the first real cost associated with starting a business, you scrutinize this number more than any other expense.  I always shop around and fiercely negotiate down to the penny.  

But the truth of the matter is that the quotes from your suppliers and factories aren’t the only factors to include in your CoGS number. There is a broader way to calculate the true CoGS, and in many cases, I bet that those expenses are not examined as closely as they should be.

The missing pieces

When I first started out, I didn’t provide myself with an accurate snapshot of what it really costs to sell my items, beyond the simple list price from the manufacturer or wholesaler and how it related to my gross profit margin. Perhaps it was because once I made my initial order and starting selling products, the money felt more like it belonged to the separate entity of my business versus out of my personal pocket.

Take it from me, and start looking at these other costs from the very beginning. By expanding your calculation of the real costs of goods sold to these three additional numbers, you will get  a clearer picture of just how profitable of a business you can run.

1. Landed costs

Landed costs include costs associated with getting your product from point A to point B, which can include shipping, customs, tariffs, duties, insurance, wire transfer, currency conversion fees and taxes. I have International Wire Transfer fees for all the products I import, and those costs can add up over the course of a year.  However, those fees can be negotiated if you have a strong banking relationship.

Another cost that is difficult to quantify, but important to take into consideration is the lead time required for your products to come in. This lead time affects your ability to provide Just In Time inventory control and it affects your cash flow.

Packaging is a real part of Cost of Goods Sold

2. Packaging

I tend to look at packaging as a marketing cost because packaging tells the brand’s story. There are lots of small costs to consider that begin to add up: ribbons, tape, tissue paper, shopping bags, custom stickers, padding and shipping fillers, envelopes, boxes... and that’s just for an online store!

When I was a buyer at Bloomingdales, I watched so many new companies get excited when we decided to purchase their clothing  line.  I didn’t have the heart to tell them that we might be the worst thing that could ever happen to them. Truth be told, they weren’t aware of the costs that we would charge for shipping items without hangers or UPCs, or not having a Dun & Bradstreet number.  

These costs can be crippling when you are dealing with big box retailers and when margins are already slim. These mandatory packaging costs that aren’t anticipated can add up and severely deplete profit margins.

3. Customer service & onboarding

This isn’t really an accurate cost for accounting purposes, but it is something I have learned firsthand is essential:  make sure you understand just how much customer service and onboarding might cost before diving into a new product offering.

If your product is so new or so unique that you need to showcase and explain your product in detail in order to convert new clients; or if you need to have skilled or technical staff onboard new customers,you really should quantify that annual cost and work that into your cost per item as per annum.

Alternatively, if you have a lot of products that are frequently returned or defective, that is a true cost that you need to add into your costs of goods sold to understand what you should be charging to have a healthy gross profit margin. Unfortunately, a lot of these costs can only be quantified in the rear view mirror.

Try to set aside time each quarter to quantify the aggregate of these costs, and see if there is a way you can allocate them per product sold to get a better snapshot of your true cost of goods sold. Your profit margin will thank you later!

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About the author

Dafina_Corporate_Headshot_large.jpg

After graduating from Georgetown, Dafina Smith began a career in Retail Sales & Branding.  As a former Buyer at Bloomingdales in the Men's Fashion Dept she was responsible for purchasing & cultivating brands such as Fred Perry, Sean John and G-Star.

In 2007 she expanded her family business Sunny's Hair & Wigs to Atlanta.  Under her guidance, the brand became a fixture of the Atlanta beauty community and was featured on shows including The Real Housewives of Atlanta, The Braxtons, Love & Hip Hop and What Chilli Wants. The brand developed partnerships with Film & TV Productions including Flight, The Fast & The Furious, The Hunger Games, Being Mary Jane, Teen Wolf and The Game.

Smith now manages all aspects of the e-commerce division for Sunnyshair.com as well as all social media and marketing from New York.

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See Also: 

7 essential Shopify tools I use to operate a six figure business as a stay at home mom

Bringing the In Real Life experience to eCommerce

The inventory value of your stock: making sense of FIFO, LIFO and WAC 

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