Why every CFO should audit the COGS

🛠 THE CFO EFFECT PLAYBOOK (Part III)

Step One: When the numbers don’t make sense

When I joined Transformer Table, something immediately caught my eye.

Month to month, our COGS margin was swinging by 1,000bps!

But nothing in the business justified it.

• No major change in product mix

• No big supply chain disruption

• No unusual promotions

Yet the P&L looked like a rollercoaster.

So, I did what any good CFO does when something smells off.

I dug deeper.

Turns out, the team was expensing containers the moment they arrived, regardless of what was actually sold that month.

In other words, we were recognizing costs before revenue.

And one of the golden rules of finance is simple:

Your cost of goods sold should match the goods you’ve actually sold.

That mismatch made our gross margin completely unreliable.

We corrected it (moving from expensing to capitalizing inventory) so that COGS would finally reflect sales, not shipments.

That single change made our monthly margins instantly more meaningful.

While this seems like an obvious one, you won’t believe how many companies are over or understating their COGS because of system limitations or team limitations.

our challenge was both.

We were using QuickBooks which was very limited in terms of what it can do.

The team had no experience or strong accounting background.

Step Two: Marketing hiding inside the COGS

A few months later, I spotted another irregularity.

Some products were being sent out as free samples to influencers or used for photo and video shoots.

Yet those products were recorded in our COGS because for our team it was the logical thing to do.

Those are marketing expenses (not COGS).

But because they were “products,” they got lumped into the cost of goods sold.

Thus, we reclassified them under marketing, where they belonged.

The impact was immediate:

• Gross margin became consistent and comparable.

• Marketing spend finally reflected true acquisition cost.

• Leadership could now see how much we were really investing in brand vs. product.

Step Three: The million dollar lesson

But the biggest surprise came later.

We were doing product roadshows: shipping demo units across North America.
When I pulled the numbers, I saw close to $1 million in COGS linked to these events.

No one seemed bothered by how the logistic worked for those events.

Here’s what was happening:

• We’d send demo products to events.

• They’d come back damaged or unsellable.

• We’d pay to ship them back and store them.

• Then scrap them at full cost.

So, we were paying to lose money.

Again, these were not really COGS. They were used as marketing material to sell products during the roadshow.

We completely restructured the program:

• Started selling demo units on-site at a discount.

• Moved leftover demo costs to marketing (where they belong).

• Stopped bringing dead inventory back to the warehouse.

We cut waste, improved profitability, and gave marketing a cleaner view of its true ROI.

Step Four: The story behind gross margin

Your gross margin should move for a few main reasons:

1. Pricing

2. Product mix

3. Channel mix

4. Cost of products + freight

5. Currency mix (FX)

When you see unexplained swings in margin, don’t assume it’s “just timing.”
Open the box.
Ask:

• What exactly is being booked under COGS?

• Are marketing or promo costs hiding there?

• Are we recognizing costs before we recognize revenue?

• Are we treating damaged or demo products properly?

Because your profitability starts at the top.

And if your COGS is messy, every metric below it becomes meaningless.

The Practical Takeaway

• COGS ≠ catch-all. If it doesn’t directly support a sale, it doesn’t belong there.

• Match cost to revenue. Expense products when sold, not when received.

• Separate marketing from margin. Free samples, influencers, demos → marketing.

• Audit your COGS monthly. Look for anomalies and reclass where needed.

Next Week’s Episode:

🔜 ERP 101 for CFOs

You guys have been in the hundreds to write to me about this topic.

Most CFOs think ERP systems are plug-and-play.
Buy the software. Turn it on. Watch the magic happen.

I thought the same, until I led our own ERP project.
That’s when I learned the hard truth:
An ERP does not come ready to plug in. You need to build it.

Next Sunday, I’ll walk you through what every finance leader needs to know before they start their ERP journey:

✅ Why implementing an ERP too early can slow you down instead of speeding you up
✅ The hidden nightmare of data migration (and how to survive it)
✅ How to manage consultants, control scope creep, and stay in the driver’s seat
✅ The real reason to implement an ERP. And it’s not automation

Because ERPs are the company redesign projects disguised as software upgrades.

If you’re about to lead (or inherit) one, this episode will save you months of pain and potentially millions in mistakes.

Disclaimer:
This content is for informational and educational purposes only and should not be construed as financial, legal, or professional advice. Always consult with a qualified advisor before making any business or financial decisions. The author and publisher disclaim any liability for actions taken based on this content.

Talk soon,