I have spent a decent amount of time trying to perfect our chart of accounts, specifically cost of goods sold versus expenses.
I had been taking information found in a PLANET book on pricing, taking considerations of my mentor’s chart of accounts for his company, and our office manager.
Basically, in accounting, there are 3 main sections: Income, COGS, and expenses.
Cost of goods sold are supposed to be the actual cost of producing whatever it is you sell, which, I guess there is no “right way” to determine which is cost of goods sold versus which is an expense.
In my opinion, for landscaping, I saw the COGS as:
- Labor + Labor burden (payroll taxes)
- Job Supplies
- Shop supplies & mechanic’s wages
- My office Manager’s pay
- My field manager’s pay
- Equipment rental
- Rubbish Removal
- Credit card processing fees
In my eyes, these above expenses were what a job costed us to produce, essentially our “variable costs”. As in, I wanted my COGS to reflect ALL the costs of producing the job, so I could come up with a break even point based on this and the total labor hours worked by our crews in the field.
Another words, if we produce a job, it uses a certain amount of fuel and a certain amount of my office manager’s time, etc. The more work we produce, in a direct ratio, the above items increase. If we produce no work, these items would be at or very close to zero.
In the PLANET book, however, the author states the COGS should ONLY include items you ESTIMATE. Another words, his COGS only includes:
- Labor & Labor burden
- Equipment Rental
- Job Supplies
And thats it.
As a second opinion to compare to, my mentor Rich’s COGS includes all I have and more, including registration fees for trucks, etc.
The problem by keeping books in inconsistent ways is comparison purposes. If I want to compare against the industry standard of other companies, I should keep my books the way most other companies do. If I want to keep a gross margin of around 50-55% (industry standard) then I need to be keeping my books in the same way as the companies I compare to so I am comparing apples to apples. For example, with Rich, when I told him about this industry standard profit margin he said he has “never heard of anyone with a profit margin that high”. This is simply because he keeps his chart of accounts differently.
In the end, I did keep the short list for the COGS. To address my needs which is to determine our break even charge rates etc, I devised a spreadsheet that pulls numbers from whereever they happen to lie in the chart of accounts.
For example, with the short list I may determine that my breakeven point is $15/hour (labor + 25% labor burden) according to my COGS list. However, this is not accurate in my eyes because if we charge $15/hour, we are still going to have to repair the trucks, my office manager is going to have spent her time scheduling the work, etc etc.
So in this excel spreadsheet I pull in more numbers from my original COGS list that are now listed as expenses. I am still able to get the calculated charge rates I want, but my books are in a “standard accounting practices” format for anyone else who happens to look at the books.