Start with the value of your inventory at the beginning of the month (or quarterly, depending on your accounting practices). COGS is often your largest business expense, so these numbers are essential for monitoring your income and cash flow, as well as for determining your gross profit margin.Ĭalculating COGS With the Small Business Inventory Model COGS can also give you a picture of what kind of sales your business will need to generate in order to grow, and whether your pricing model is on par with market demands. Your COGS measures whether the pricing of your products and services are appropriate for the market. Your COGS is directly linked to your business profits keeping tabs on your COGS will help you monitor the financial health of your business. Understanding fluctuations in your COGS can help you determine the value of your business. In short, COGS is an accounting term for the actual cost of your marketable business products or services. If your business manufactures products, the COGS formulation is more complex, since you must account for all raw materials and labor costs that go into production. If your business purchases products to resell and maintain inventory, the COGS accounts for the costs of items purchased for resale. In order to turn a profit, you need to make sure your COGS is lower than the dollar amount your business charges customers to buy your goods or services. COGS summarizes the aggregate of all the costs it takes-including inventory, raw materials, labor, and wages-to bring your consumer goods or services to the market.
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Cost of goods sold (COGS) is how much it costs to produce your business products or services.
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