Mind your COGS and Margins

Foxtrot auction is not OK, The most sustainable almond farmer in the world, and baby snacking as a core category

May 15, 2024

2-min read

I’m still seeing P&Ls that need work.

Let’s start with margins. Gross profit margin is all about the health of the business. It is the profitability indicator. Gross profits are net revenues minus cost of goods sold (COGS). Gross margin is the percent of gross profit to net revenue.

Gross margin = gross profit / net revenue

Investors didn’t used to care that much about margins in the early stages. So long as there was a path to exit, that’s all that mattered. You could pour a ton of money into a startup and outpace competitors and get to the next round of funding on a revenue-based valuation.

Not so today. Investors now are scrutinizing path to profitability more closely, and at earlier stages. That means they are really looking at your gross margins.

Secondly, make sure you’ve captured everything in your COGS because sometimes startups quote an attractive gross margin to investors, then during due diligence the figure gets ugly because of omissions.

Don’t be a victim to misrepresented COGS — make sure you’re capturing these items:

Raw material all-in costs

Your ingredients and packaging costs should include inbound freight and any storage fees. Projections on raws can only correctly be determined by talking with your suppliers about volume price tiers and contracted pricing vs spot. You should have high and low assumptions that cover anticipated market volatility for some inputs.

Shrink

Shrink is loss of inputs during production (think moisture loss, line purging, what’s left in the tank, the labeler goes crazy, that sort of thing). So there is no doubt you’ve accounted for shrink, make this a separate item on the P&L and don’t lump it into raws.

Direct Labor

If you self-manufacture, even if you yourself are working the production line “for free”, you must account for what would be the labor cost (with burden) when eventually someone else takes your spot. This includes set up, change overs, clean up, and sanitation.

Overhead

This is the manufacturing overhead or indirect costs associated with production, like electricity. If you are contract manufacturing, the cost of raws and shrink should be transparent to you. Therefore, the toll charge is simply the co-man’s labor, overhead, and profit.

The validity of your numbers at first pass is what you want, so you can move the conversation with investors to the opportunity and your right to win.

All my best,

Jennifer