We asked ten different edibles manufacturers what their cost was for their finished products. Some amazing profits could be as high as 90% margins. Others were starting to struggle to compete with up to an 80% cost of goods sold. Were their production processes so different? The quality of ingredients? What we found out was that not one of the 10 truly knew their true costs of goods sold and certainly not by individual product.
Let’s take the example of the insanely profitable manufacturer with a 10% cost of goods sold. How did they calculate this number? They took the cost of ingredients for a single batch of products and divided by the number of products in the batch. They neglected to factor in the freight costs, damaged products, discounting dead stock, or even their labor. Labor is the largest single cost in most manufacturing. By using this misleading number of 10% cost of goods sold they can easily make the mistake of reducing their price below their breakeven point without even knowing it.
Now let’s look at the other end of the spectrum, our manufacturer with the 80% cost of goods sold. They went the other direction and included everything in their cost of goods sold. They included the cost of capital, owner’s compensation, travel/entertainment, licensing costs, depreciation, property taxes, etc. Many of these are fixed costs have no bearing on the cost of goods sold. If you increase your sales and production by 50% these costs will still be the same.
So why are these smart people making such simple mistakes. Because they do not have a good way to track these costs. This is why a good manufacturing software system is so critical. It is absolutely essential your program can accurately track labor cost, price of ingredients, lost/damaged products, discounts, and freight costs.
Some of you might be thinking that your accounting software does the same thing. Yes and no. In general, your accounting software will track your labor. But it can’t tell you how much time was spent waiting for orders to come in compared to how much was truly spent in production. It can’t tell you the variation in labor for different products. For example, two products may have a very similar cost of ingredients, but one may take 8 minutes in labor to produce a batch, compared to another product that takes 2 hours. The TRUE cost of goods sold for these products is very different. There may even be extreme variations in this labor time based on the employee doing the work.
Once you have this valuable information you can use it in many ways including product pricing and cost reduction. You can confidently set a price point that will keep you profitable and be competitive. By looking at the information from your manufacturing system, you will be able to pinpoint high cost products. Then correctly determine the best ways to reduce these costs or focus your marketing efforts on more profitable products.
It’s a great time to be in the edibles business, but as competition heats up you need to make sure your management software will help you get to and remain profitable. At WeedWare we are proud to offer a complete manufacturing management program. Includes the tracking of recipe management, inventory control, damaged products, and labor tracking. Check us out at www.weedware.io.
Jason Saunders, President: WeedWare.io