Just what you want to hear! Pricing info! (Yes, that was meant to sound completely sarcastic) 😂
But seriously, understanding your Cost of Goods (COGS) is fundamental for the success of a handmade business, especially in fields like wood flower floristry. The COGS represents the direct costs associated with producing your handmade products. Here's why (Part 1) it's crucial and how (part 2) to effectively keep track of expenses to calculate it:
Part 1: Why it is crucial to understand your cost of goods:
Accurate Pricing
Knowing your COGS is essential for setting prices that cover all your expenses while ensuring a profit. This means anything that you bought to assemble, create and sell your product. It basically gives you the break-even point. You need to know how much you have in your design before you can even think of pricing it. If you underprice your products, you risk not covering your costs and jeopardizing the sustainability of your business. I am very passionate about pricing your creations accurately, because underpricing can hurt the industry as a whole. I have a blog I want to call “Pricing Etiquette for Wood Flower Florists” that's coming soon.... and it might ruffle some feathers. 🫣
Profitability:
Calculating the COGS helps you determine your profit margin. It's not just about covering costs for breaking even; it's about making a profit that allows your business to grow and thrive. If you have overhead costs, you simply need a higher profit margin than before you accrued extra costs associated with running your business. If you aren't selling more, you need to charge more to cover the increasing overhead.
If you sell your creation for $100 - you did not just make $100 in profit because you spent money on the flowers, the container, the moss, the foam, the wires, the glue, the paint, the brushes and containers to do the painting, and more. If it cost you $55 in those costs, you really only made $45 in profits, and that is only the cost of your hard goods - you haven’t factored in your time, operating costs, overhead or costs of training from courses or coaching with business coaches or mentors like me. (Yes, you can factor those investments into your pricing structure! That is why it is called an investment - you should see return on your dollar!)
Informed Business Decisions:
Understanding your COGS empowers you to make informed decisions about production methods, materials, and pricing strategies. It provides a clear picture of where your money is going and where adjustments can be made.
For example:
how much do you pay in bills per month?
Where is that cost built into your pricing structure?
Do you pay yourself regularly?
Do you hire help? How much does that cost per hour?
Do you own a website domain?
Do you pay a monthly fee for your website? How about a CRM (Customer Relations Management Software) How about bookkeeping integrations? Inventory Management Systems? Subscriptions like Canva, Flodesk and more? All of that is overhead costs. You need to be putting all of these costs into your COGS so you aren’t pricing your creation that cost you $55 in hard goods and $40 in time and overhead for only $100 because now your profit is only $5. Why would you do all of that work for ONLY $5? You can’t forget how much really went into that creation. This is why many handmade businesses fail - and I fell into that pitfall when I opened my own commercial location. I needed to rethink my pricing and REALLY get honest about what I was spending my money on and if it was actually worth it.
Cost Control:
Tracking expenses related to production allows you to identify areas where costs can be optimized. Whether it's finding more cost-effective materials or streamlining production processes, controlling costs contributes to a healthier bottom line. In plain terms, where can you save money when sourcing materials. And what can you live without??
Asking yourself the following is a great place to start:
Do I use this on a daily basis? Weekly? Monthly?
Am I getting the most out of this product/subscription or am I leaving money on the table?
Is this expense related to business or is it something that my personal account?
Will it benefit me to order in bulk from a wholesaler? Why or why not?
Can I find a similar item for a better price in bulk or a new supplier?
Am I able to take control of my costs down to the flower and greenery sprig to know what it impacting my bottom dollar?
Am I able to cut out subscriptions or services that aren't actually helping me, or that I'm not actually utilizing?
Part 2: How to keep track of expenses to calculate your COGS:
1. Separate Business and Personal Finances: Have a dedicated business account to avoid mixing personal and business expenses. This ensures clarity when tracking costs. I'm not a tax professional, nor a lawyer, but this is a basic rule of business that keeps things streamlined and legal.
2. Expense Categories: Categorize expenses related to your wood flower floristry business. This includes materials, tools, packaging, shipping, and any other direct costs associated with creating your products. You can help yourself out in the long run and contact your CPA to help you know which categories will set you up for success come tax season.
3. Record Keeping: Maintain meticulous records of all transactions. This is easier said than done! (Seriously, I'm still working on a system that works for me to do this better, please share any and all tips in the comments of this blog!!) This takes daily discipline and taking action after every transaction. Digital tools like accounting software or even a simple spreadsheet can help you keep track of expenses efficiently. I am like a roller coaster with this habit, and I always get mad at my past self when it's time to tidy up the transactions. Someday, I hope I can write a blog on what transformed this for the better in my own business!
4. Include Overheads: While COGS focuses on direct costs of hard goods, it's essential to consider overhead expenses, such as utilities, rent, and marketing, when determining the overall cost structure of your business. I described this above many times in many different ways - I’d love to chat with you 1:1 to help you come up with a list of your overhead costs in your business in a coaching call if you would find that helpful.
5. Adjust for Seasonal Changes: If your business experiences seasonal variations, adjust your calculations to reflect the impact on costs during different times of the year. This would apply to seasonal greenery you found on sale. If you charge the seasonal price, when you source it for full price you will be eating into your profits!
So, are you totally overwhelmed yet!?
As a beginner, I could have used a hand-holding coaching session when I first started pricing my creations, that’s for sure. I’d be happy to help you do so if you’re reading this and feeling like it’s all too much. A clear understanding of your Cost of Goods is foundational to the financial health of your handmade business. By tracking and analyzing expenses (sounds fun, right?) you can make informed decisions that contribute to the long-term success and sustainability of your wood flower floristry business.
Let’s use the comments of this blog post to ask any questions, provide any scenarios and to give input on how you currently track COGS in your handmade business?? We can learn from one another and benefit the wood flower florist community as a whole ❤️ ⬇️✨
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