SKUs (stock-keeping units) are often used to refer to different versions of the same product.
For example, a shoe product may have a SKUs for each size.
If you have chosen to use SKUs for your catalog structure in Global settings then SKUs will appear under Apps / Catalog / E-commerce System. A SKU refers to only one product, whereas a product can have many SKUs.
You should create the list of colours and sizes first. This way you will be able to select them when creating SKUs.
To create a new SKU for a product select which product it refers to...
...then enter the SKU information.