What is cost of sales in relation to your business?
In its most basic form, cost of sales refers to the costs involved in producing the goods or services that your company provides. Knowing it will enable you to ensure that the company stays profitable over time.
Some aspects to your cost of sale may be fairly quick for you to quantify, as there may be materials and production costs involved (i.e.a direct spend in order to generate a sale). It can become trickier in service-based industries where it is about time and knowledge. Many will have a blend of the two making up their cost of sale KPI.
Therefore even simple actions such as consistently tracking the time it takes to generate a sale, and the amount of marketing literature and communication it takes (brochures, emails, events etc), can provide you with invaluable business information to make your company more efficient and profitable.
It is a vital stat that you need to keep on top of, just as much as general and administrative expenses.
Knowing the cost of sales for your business allows you to understand the financial health of your business better and make well-informed decisions about what actions to take next.
How can cost of sales be calculated?
Calculating cost of sales can be worked out using this formula:
COS = Cost of goods sold (COGS) + other attributable costs such as cost of direct labour, fuel used in provision, storage and so forth.
Whether or not you sell a product or a service, knowing the profit margins for your business is a key metric that you need to understand in order to find success.
As business coaches, we have seen time and time again that companies are inadvertently focusing their marketing and sales efforts on their lower-margin, higher-cost products and services. This may be because that is where the greatest volume of sales and opportunity lay, but that doesn’t mean that is where the greatest profit is for you!
If they flipped their focus to the higher margin and lower cost products, they could change their company’s profitability levels, potentially reallocate resources to allow for growth and scaling, and much more besides.
It will be unlikely that you can switch yours as straightforwardly as this. But the principle stands that by understanding your cost of sales as a business, by department and product, you will be better able to make strategic business decisions about where your company develops, i.e. in the most profitable areas.
Knowing how much each of your products actually costs to sell is one of the most important statistics to know about your business, as your product is what’s making you money – you don’t want it to be causing you to go into the red!
What is cost of sales – What is the next step?
Understanding KPIs is paramount to the success of any business, but especially for small and medium-sized ones, because, as the owner, you are likely to feel the consequences of strong and poor KPIs personally!
Knowing the costs associated with stocking your products or producing the service that you sell will enable you to make more informed decisions about budgeting throughout your company.
Perhaps you need to be buying less stock in order to make back the money from your current batch, or perhaps it’s time to look at your wider operating costs and find out where you’re spending a little too much. Knowing the cost of sales will help with all of this.
Here at UK Growth Coach, we work with business owners from across the country to implement trackable, achievable goals in order to drive real business growth.
If you’d like to have a business review with us to talk about this in more detail and specifically for your context, follow the link here to book one today.
