COGS. What is Cost of Goods Sold and why is it so important?
We often get asked about COGS. “What is Cost of Goods Sold and why is it so important?”
Well, to start with, it’s one of the biggest numbers on your Profit & Loss so you better pay it some attention!
Here are the 3 main reasons to check it regularly:
It’s one of the key measures to see if your pricing is right.
It lets you know if you’ve made a margin on the things you’ve sold.
It’s also a good indicator of wastage and how much you’re discounting.
But what is it anyway?
The answer is in its name.
It’s the cost of the goods you’ve sold.
It keeps track of all the costs related to the items you sell, whether they’re products or services.
Once you know the actual cost of the things you sell, you can make sure you are charging an appropriate price for them.
But when you set the price, remember this. You not only have to cover the actual cost of the things you are selling, or costs to produce it, but also the overhead costs of the business. Those are not included in COGS, things like marketing, rent and wages.
COGS doesn’t include the overheads of the business. It only covers the direct costs of the things you’ve sold.
Turn it into a percentage %.
To get real meaning from COGS, make it into a % of Sales.
COGS/Sales x 100.
For many businesses, the guide has been 30 – 35% for years.
It means for every $100 in sales, $30 is spent on cost of goods sold.
That means you have $70 left to run your business (Gross Profit).
That’s why it’s so important to track your COGS. To check that it stays around your target level. Because, once you’ve paid for your COGS, you only have what's left to run your business.
And pay yourself.
Check it at least every quarter, every time you do your BAS.
Let me know if you need a hand.
Peter
