Whether your business sells products or services, it’s important to know “what is the cost of goods sold?” for each item or service you sell. This number provides the basic information you need to build traffic and to grow your company.
What Is COGS?
COGS puts a number on the costs of goods and services, whether an item is sitting around a warehouse or your staff is waiting for a customer. Even when you’re not selling, what you sell is costing you money, and when you learn how to determine cost of goods sold for a business, you get this exact dollar figure. COGS appears on your profit and loss statement and helps you calculate net income. It is also the largest expense at many companies, so learning to manage COGS can help you with revenues and with just about every financial decision at your company.
Knowing COGS can help you make key decisions about your business. If you want to seek financing, for instance, interest can increase your COGS, so knowing what the current costs are can help you determine whether you can afford another loan. If you are pricing a product or considering price increases, COGS can help you understand how much you need to charge to make a profit.
How to Determine COGS for a Business
You don’t need to be a mathematician to calculate COGS. The formula for starting to calculate COGS is easy: starting inventory + purchases of inventory - end inventory For example, if you have 100 writing journals in your shop and you create 100 more, and then your end inventory is 150, the total number of journals you have sold is 50. Once you know that, you can determine how much it cost to create each journal, so you can determine COGS. There are three ways of doing this:
- First In, First Out (FIFO): In this evaluation, you assume the latest products in your inventory are the ones selling or being put out for sale first.
- Last In, First Out (LIFO): In this evaluation, you assume the older items sold first. This can be especially true with perishable goods.
- Average Costs: This determines an average price per unit. To calculate this, you add purchases in dollars and the beginning inventory. You divide the number you get by purchases in units plus beginning inventory. This gives you the average cost per unit. Once you have this number, subtract the number of units you have sold to get COGS.
Determining COGS can help you manage your business and finances more effectively. If you’d like someone to calculate COGS for you, handle bookkeeping or help you with consulting or related support, contact SLC Bookkeeping. Our professional bookkeeping and small-business consulting services take the guesswork out of business management and bookkeeping, paving the way for your success.