When I was in private equity and investment banking, I learned the power of manually verifying financial metrics. It gave me a way better understanding of each business, but also helped me find errors. As a software investor, gross margins was top of mind so I will use that as an example here.
Every month, I manually document and calculate the COGS and gross margins for my company. The process has allowed me to understand not just the numbers but the story and trends behind them. It's like peeling back layers, revealing insights that automated reports simply overlook.
By running this analysis on a cadence, it provides financial discipline. Naturally after I run this analysis, I start looking into other financial aspects. It also makes me aware of all the different COGS components, and often times I start thinking about ways where I can improve my gross margins here by finding a better vendor or pricing my offerings differently.
There's something about crunching the numbers with your own hands that sharpens your mind in ways passive analysis cannot. Each time I manually work through the financial data, I find myself becoming more adept at spotting trends, understanding cost structures, and predicting financial health. This hands-on approach has fine-tuned my analytical skills, making me a more effective and insightful investor.
In this sample template, which you are free to download, I lay out revenue and a bunch of software COGS by month. Here, given it's a software company, it's AWS, MongoDB, Twiliio, Zapier, Facebook, TIktok, and Snap, but it can honestly be anything. For a food business, it may be raw materials, packaging, and delivery.
In this spreadsheet you just have to manually update the revenue and each individual COGS item by month. Then it will automatically categorize them (in this case it's HOST, WEB and CONTENT) and run a gross margin analysis. Lastly, this spreadsheet then automatically rolls up the monthly expenses into annual as well.