Calculating Cost of Goods Sold in Fashion Business
A fundamental aspect of running a financially sustainable fashion brand is understanding the true cost of producing each item you sell. Cost of Goods Sold (COGS) is a critical financial metric that determines how much a business spends directly on manufacturing its products. Without a clear grasp of COGS, fashion entrepreneurs risk mispricing their items, underestimating expenses, and ultimately reducing profitability.
COGS includes all direct costs related to the production of fashion items. The term typically covers fabric, trims, zippers, buttons, labels, packaging, and labour costs directly associated with manufacturing. For brands that outsource production, it also includes the fees paid to garment manufacturers. However, it does not include indirect costs such as marketing expenses, rent for a showroom, or administrative salaries. Understanding what constitutes COGS helps in setting appropriate pricing strategies that ensure profitability.
Accurately calculating COGS requires meticulous record-keeping and cost tracking. Many fashion entrepreneurs overlook hidden expenses, such as sample production, wastage, or fluctuations in material costs. These factors must be considered to get a precise understanding of how much it costs to create each piece. For instance, if fabric prices or labour wages increase, COGS will also rise, affecting the overall profit margins. Monitoring these costs aids in making well-informed decisions regarding sourcing and pricing.
The impact of COGS extends beyond pricing. It plays a crucial role in financial statements and tax reporting. A high COGS relative to revenue indicates that production costs are consuming most of the income, which may signal inefficiencies in sourcing or manufacturing. Conversely, a lower COGS suggests better cost control, which can lead to healthier profit margins. By regularly analysing COGS, fashion entrepreneurs can identify areas for cost reduction, such as negotiating better supplier deals or improving production efficiency.
Financial literacy in this area enables fashion CEOs to make smarter business decisions. A well-managed COGS ensures that a business remains competitive while maintaining profitability. Without understanding this metric, a brand may either overprice its products, making them unaffordable to customers, or underprice them, leading to losses. Pricing decisions should be based on a balance between production costs, market positioning, and the desired profit margin.
For African fashion entrepreneurs looking to scale, mastering COGS is non-negotiable. Whether working with local artisans, small-scale manufacturers, or international suppliers, understanding the real cost of production is key to sustainable growth. By continuously monitoring and optimising COGS, fashion brands can build a solid financial foundation, ensuring longevity and success in the competitive fashion industry.
