I recently did a workshop on budget and finance. The first part of the day we talked about the importance of a budget and how to make a budget. And we actually built a budget for each person. The second half of the day we focused on finance and understanding your financial statements.
When we got to the second half, we spent a lot of time talking about costs and which buckets they fall in on your profit and loss.
Your profit & loss has three sections. You have income, and then you have cost of goods or cost of sales, and then you have G & A expenses or overhead. So let’s go into detail with these.
The two buckets we are going to focus on are the expense buckets – Cost of Goods Sold or Cost of Sales and General and Administrative (G&A) Expenses. Now note, with the Cost of Goods Sold or Cost of Sales, what you call it depends on what you do or sell in your business. If you are in retail or sales and you have inventory then you are going to call it cost of goods sold. If you are in a service based business then you will call it Cost of Sales.
The costs that go into your cost of sales are the costs that are directly related to what you do. This means that without a sale you do not incur these costs.
Think about a cupcake business. Your direct costs are going to be the ingredients you need to make these delicious cupcakes – such as the eggs, flour, milk & icing. You only buy these ingredients when you get orders to make these cupcakes.
Your G&A costs, or as I like to call them – the expenses you pay to keep the lights on; the ones you pay no matter what. These are your utilities, telephone, marketing, dues and subscriptions, rent, accounting, legal and insurance. These are the things that, whether you have a sell or not, you still have to pay those costs.
You may also hear G&A referred to as overhead or fixed costs. Costs that are not affected by how much or little you sell. You still have to pay them.
The costs of sales may also be referred to as variable costs because these costs only occur when you have a sale. If sales go up, your costs go up. If sales go down, then your costs also go down.
I hope this helps you make sure you have your costs in the right buckets so you can know what your true Gross Profit is as compare to your Net Profit (that’s another blog).
