Okay, remember when we talked about Assets and we said that assets are things you own that have value or usefulness. All true. That’s exactly what an asset is. But, in true accountant OCD minute detail spaz attacks, we’ve broken assets into several categories on the Balance Sheet:
-Current Assets
-Fixed Assets
-Other Assets
We’re going to start with Current Assets. Because our little accountant hearts like order and tidiness, the order I listed them in above is the order they are always in. Yeah, we’re not big on surprises. We want to know exactly where our stuff is at any given time. It’s why we alphabetize our CD’s, and our DVD’s and our spice rack. No, really. Every accountant I’ve ever met does this in some way.
I know. Sad. ☺
So: Current Assets.
I went over this in the post titled: Not All Sales Are Good Sales . But, I’m not going to go into such great detail here because we’re taking very small bites at this at this lovely thing called Financial Statements.
Hopefully I won’t bore you in the process.
Gross Margin, also called Gross Profit, is a confusing couple of words that mean the difference between Revenue and Cost of Goods Sold (COGS). Now, pretty much everyone gets Revenue and we went over COGS yesterday. Just to remind you though, COGS are those things you have to pay for that relate directly to producing the sale. So, if you sell Gift Baskets, then your COGS is the money you spent on the stuff you put in the basket, plus the basket itself.
Gross Margin would be how much money you have left if you subtract what you sold the gift basket for and what you paid for the basket and all the stuff you put in it. So, you sold the basket for $25, you paid $5 for the basket and another $10 for everything else, that means your Gross Margin is $15 ($25-$5-$10).
So, you made a sale — fantabulous! Right? Right? Buehler?
Weeeeeeellllll…Maybe.
When you first get started in business you’re looking for sales. Even if you have to discount it to the bone, a sale is a sale you’re thinking. But, in reality, not all sales are created equal. There is such a thing as a Bad Sale.
For example:
- A sale that doesn’t cover your Gross Margin (What you paid for the product plus what it costs you to get it ready to be sold.)
- Too many sales of a lower price point product.
- A sale that doesn’t get collected for ninety days.
All of these have problems with them. A sale that doesn’t cover your Gross Margin actually costs you money. Hello, Not the Goal!
Ahhhh, COGS. Or, COS.
COGS is a short hand for Cost of Goods Sold or COS: Cost of Sales. And, it is exactly what it says: It’s the amount of money you had to pay for something you’re going to sell.
Now, this doesn’t necessarily mean a “thing”. This could be money you pay a person to do something for you that makes Revenue for your company. BUT, it has to be someone who DIRECTLY produces revenue.
Here’s two examples from clients I’ve worked with:
Example 1: A company sells windows. The guys they pay to install the windows are a direct cost associated with the revenue the company earns from selling the windows. In this company’s business, they only sell windows they install. So, no installer, no sale. Therefore, the installers are a Cost of Goods Sold. Other direct costs of selling the windows would be things like the windows themselves, the caulk needed seal the windows and the cladding on the outside of the window.
