Spinning off COGS

I had a recent phone call with a client. He has a successful business. He, like so many other entrepreneurs, likes to pursue ideas and opportunities. He sees a potential opportunity to expand his operations (or stand up a separate entity) into areas his current business uses.

Imagine an ice cream shop wanting to build a dairy. There definitely might be an opportunity there. They spend money on milk. That would make them a customer of their own business. Additionally, they could sell the milk from the dairy to other businesses like yogurt companies, grocery stores, and even other ice cream shops. Sounds like a winner.

BTW, my client isn’t an ice cream shop owner. I’m just using this as an illustration, but I’m sure you already figured that out.

I love this mindset. It’s SO entrepreneurial. I’m in! Well, maybe I should slow down. I get excited easily. So, maybe I need to help my client temper his enthusiasm as well. Let’s walk through this together.

After a brief shared time dreaming we agreed the focus right now for his business needs to be on the current service offerings, which by the way, is selling a ton of ice cream. (Again, not really ice cream.)  But, the dream isn’t dead, it’s just acknowledged for a later time. 

So what do you do with a dream like this? I like to say let the numbers tell us what the next pursuit is. There are times in the course of a business (sometimes quickly, sometimes over years) where a certain cost of goods sold (COGS) will speak loud and clear … “Make me my own company and watch me grow!” That’s when it’s time to bring COGS inhouse or spin off that part of the P&L to a separate entity where its opportunity can be pursued.

In 2020 I purchased a business where there was a compelling COGS situation where I rolled those expenses into an opportunity with its own brand, P&L and management. It was instrumental in helping us track some incestuous expenses which were clouding our service pricing. Long story short, the numbers spoke loud and clear. From there I simply had to think through all the other implications and in the end it was its own DBA complete with separate books, logo and even entrance.

Are you thinking of expanding your business? Let the numbers tell you. Do your numbers need encouragement to speak more clearly? Let me know. I’d be happy to look at what they are trying to tell you.

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Kyle Dreier leads small business owners through ways to grow their business by considering areas to advance and other areas to retreat—all with thoughtful consideration driven by company finncials and data.