What is Cost of Goods Sold (COGS)?
Your business’s cost of goods sold (COGS) is the cost of all the products you sell in a period. It can help you calculate your profit by subtracting COGS from revenue.
COGS = Beginning inventory + Purchases during the period - Ending inventory
COGS includes costs that are directly related to making and selling products, such as material costs, labor costs for manufacturing and assembly, shipping expenses, and factory overhead (such as rent). It does not include indirect costs such as depreciation on equipment used in production.
In addition to calculating your profit using COGS, you can use this metric to determine the profitability of individual products in your portfolio. If you want to compare the profitability of two different products or brands, then you will want to know what their COGS are so that they can be compared directly without having any other factors influencing their relative success rates (like marketing spend).
Why Is Knowing My Business’s COGS Important?
If you are a business owner, it is essential to know what your business’s COGS is in a specific time period. You need this information to know how much of your sales are going towards covering the cost of goods sold, and how much is being left over for things like paying employees, advertising costs, and other expenses.
You will also want this information if you want to compare different times during the year or different years altogether. For example, if your business has grown significantly since last year, then knowing your current COGS will help you determine whether there are any factors contributing to that growth.
In general, knowing your business's COGS can help you make better decisions about your business. For example, if you are considering raising prices to cover your increased costs, knowing the COGS of the products you sell can help you determine whether or not this is a good idea. If your COGS are low compared to what customers are willing to pay, then it may be wise to keep prices where they are and try to cut costs elsewhere in order to offset increases in your COGS.
Is Having a Low or High COGS Better?
It depends. Generally, the higher your COGS, the more money you will need to make back from each product sold. This means that if your COGS is too high, you may have trouble selling enough products to make any profit at all! On the other hand, if your COGS is too low, you may find that you are not making money fast enough to keep up with expenses like rent or payroll.
The key question when deciding whether you should increase or decrease your COGS is: "What do I want my end goal to be?" If you have a high COGS but have a goal of increasing profits over time, then you may want to keep the high COGS until your overall profit improves.
