Why? Simply put, because it is an important cog in the wheel of any organization’s financial health. It is one of the biggest indicators of revenue, profits, and business sustainability.
You also need to calculate COGS so you can write it off as a business expense on your taxes. If you don’t know anything about accounting , don’t worry.
In this post, we’ll dive into what cost of goods sold is and why it matters, review the COGS formula, and give you some tips on how to optimize it.
What is Cost of Goods Sold?
COGS is a sales and business metric that determines the instagram database value of inventory sold (and created, if you’re the manufacturer) at a specific point in time. The formula looks at all the costs directly related to your inventory, including raw materials, transportation, warehousing, and direct manufacturer labor.
Since COGS tells business owners how much it costs to acquire their products, it’s a value that directly relates to profits and revenue. For example, if your COGS is equal to or less than your revenue for that period, it means you’ve either broken even or lost money and aren’t profitable.
To calculate COGS, I followed this simple formula: Cost of Goods Sold = Beginning Inventory + Purchased Inventory – Ending Inventory
So, let’s imagine you’re crunching your quarterly numbers
You started the fourth quarter with $50,000 in inventory and purchased an additional $25,000 in inventory to keep up with holiday demand.
At the end of the quarter, you have $20,000 of contact lists inventory left. COGS = $50,000 + $25,000 – $20,000
In this case, your COGS for the quarter is $55,000. The calculation of COGS varies depending on whether you are the manufacturer or the retailer, so let’s look at both to clarify things.
Like retailers, manufacturers must exclude certain administrative expenses from COGS. Construction costs, in particular, can be tricky since some can be accounted for in COGS, but not all. Work with a trusted accountant for specific guidance to make sure you get it right.
Cost of Goods Sold Calculator
To calculate your COGS number without doing any manual sums, use a cost of goods sold calculator.
HubSpot’s Sales Metrics Calculator is a free spreadsheet where you can plug in numbers to see your key metrics, including COGS, customer acquisition cost (CAC), average win rate, and customer retention rate.
