Table of Contents

1. What is “Cost of Goods” (COG)?

2. Critical Insights You Gain by Tracking COG

3. What belongs (and doesn’t belong) in COG

4. Conclusion & Next Steps

What Is “Cost of Goods” (COG)?

COG is the real cost of the stock you used to make sales over a period of time, whether daily, weekly, monthly or yearly.
They can Include:

• The actual physical products you sell, or use to sell in order to generate revenue
• Ingredients & ready-to-sell drinks
• Packaging & disposables (cups, lids, napkins, boxes)
• Cleaning & hygiene supplies (soap, paper towels, sanitizer)

Critical Insights You Gain by Tracking COG

Every type of business has it’s own margin and percentage metric which is acceptable in so far as pricing.

In the restaurant business, this can vary between 25 to 40%.

In a typical fast food pizza restaurant for example, this COG metric is usually 30% of revenue (before VAT or GST).

Checking your COG regularly (which I recommend to be weekly), should inform you whether or not you are on track with the industry standard.

If therefore, your actual COG is 25% (instead of 30%), then you may be under-portioning and upsetting your customers which could cause your customers to leave you for your competitors.

If on the other hand, your COG is too high (like 35% instead of 30%), then you are either over portioning, wasting too much, or mismanaging your orders from your suppliers.

So if using the same example, your Gross Profit (GP) should be 70% ( which is the percentage left after paying COG).

Now if your GP is too low by say 5% (meaning that your GP is 65% instead of 70%), then this mismanagement of your “Cost of Goods” will result in you earning 5% less on your bottom line.

This loss of 5% during the course of the year, could be the difference between the success or failure of your business.

Regular tracking of your COG will help you see in “real time” which products you may have too much of, which you need to get rid of quickly before having to discard or waste them.

With good COG management, you can see the product mix clearly and promote slow moving items or intensify your higher-margin items.

What belongs (and doesn’t belong) in COG

“Cost of Goods” is everything that you need to replenish and top-up with in order to create more sales:

• Ingredients & ready-to-sell drinks
• Workers uniforms (believe it or not).
• Packaging & disposables (cups, lids, napkins, boxes)
• Cleaning & hygiene supplies (soap, towels, floor cleaner)
• Everything that depletes in storerooms and fridges even printer ink and paper is part of COG.
• Clothes and shoes (if you are in the fashion industry).
• Shampoo’s and conditioners (if you are in the hair dressing industry).

“Cost of Goods’ should NOT include:

• Labor (salaries, wages, social employment payments, etc.)
• Rent
• Advertising and Marketing costs
• Royalties
• Taxes
• Loans
• Electricity Bills
• Gas Bills
• Commissions
• Fuel (for your delivery vehicles)
• Phone and Internet

Conclusion & Next Steps

Controlling “Cost of Goods” is not just extra accounting or a waste of precious time, but should be a weekly habit that should help you ensure correct margins, support smarter pricing and ensure that your Gross Profit is maintained and stays on track.

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