Often, there is one or more broken cogs in your business that is messing up everything from predictable profits and cash flow, to predictable and sustainable growth, to improving transferable value. And, it starts very near, if not at, the top.
Do you know anyone that is selling a product or service below its cost? Do you know a salesman that will discount something to the point that you might not even exceed the variable cost. That is definitely the top of the line—REVENUE. Is that cog broken?
How about the next line on the income or profit/loss statement? That’s a real COG or COGS for Cost of Goods Sold. Many businesses, even in normal times (whatever that might be) do not really know their COGS. Often they don’t have a good chart of accounts. Often their financial person is really a bookkeeper and does not know as much as you might think about figuring that important number out
Now, it is NOT normal times. Shipping from Europe and Asia is shutting down tonight and tomorrow due to the elimination of the tariff exemption for de minimis shipments that power eCommerce. (Eimination of a de minimis exemption must be a double or triple negative or an oxymoron) As soon as the increased inventory everyone has built up runs out, the hammer will come down. People are going to go online to order something and if it is not in a warehouse here in the USA, the price they pay at checkout is going to be enormously different and the delivery date pushed way out. What is your COGS going to be tomorrow and the next day and the next month?
Let’s not even talk about trying to figure out the amount of steel, aluminum, and copper in your products that are impacted by even higher tariffs. While it’s only on a small part of many products, it’s a huge part of a washer or a dryer, tools, and car parts. Imagine the cost of a fuselage of an airplane! During my time at Daimler Truck, we had to spend great effort on determining the cost of a part. Not the cost as quoted FOB from Thailand or elsewhere. That’s Freight Out Bound and does not include shipping, customs, and so many other items that are part of the Cost of Goods Sold on your income statement. We did not even focus on the landed cost. We focused on the cost delivered at various factory doors in such a way that the cost of a part in a plant in Portland was different than the cost of a part delivered to factories in North Carolina.
You MUST get a handle on your COGS. Everyone in the business needs to understand it better. How many sales people do you know that cut out of a management meeting reviewing financials to go talk with a customer because they are bored and don’t care about much other than making a sale, watching the top line grow, getting their incentive pay, and complaining everyone else is not doing their part, and that’s why the company is losing money. If only they better understood that GROSS Profit Margin is not gross and it needs to be gross as in LARGE. Sales people have been known to work on increasing the sales of low or no margin products which looks good on the top line of REVENUE, but bad everywhere else.
I believe everyone in the business should have a modicum of financial understanding to be able to better understand the three important financial documents of any business—Income Statement, Cash Flow Statement, Balance Sheet. Companies that are ESOPs are particularly good at this.
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