Why It's Important to Know Cost of Goods Sold as a Small
Business Owner

The cost of goods sold (COGS), also known as the cost of sales, is one of the most important things that small business owners need to understand. Why?

Because it directly impacts your bottom line and can be the difference between making a profit or taking a loss. Simply put, the cost of goods sold is the direct costs associated with producing the goods or services that you sell. In this blog post, we'll take a closer look at what the cost of goods sold is, why it's important, and how you can calculate it.

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What Does Cost of Goods Sold (COGS) Actually Mean?

As we mentioned above, the cost of goods sold is the direct costs associated with producing the goods or services that you sell. This includes things like the cost of materials, labor, and shipping. It does not include indirect expenses such as marketing or overhead.

The cost of goods sold is important because it directly impacts your gross margin. Your gross margin is equal to your revenue minus your cost of goods sold. For example, let's say that you run a t-shirt company and you sell a shirt for $20. The cost of materials to make that shirt might be $5 and it might cost you another $2 to ship it. That means your cost of goods sold would be $7 and your gross margin would be $13.

Another reason why the cost of goods sold is so important is because it's used to calculate your inventory turnover ratio. This ratio measures how quickly you're turning your inventory over and can give you insight into the efficiency of your business operations. To calculate your inventory turnover ratio, simply divide your annual sales by your year-end inventory levels.

How Do You Calculate Cost of Goods Sold?

There are two different methods that you can use to calculate your cost of goods sold: the first-in, first-out (FIFO) method and the last-in, first-out (LIFO) method.

Under the FIFO method, you assume that the first items that you purchased are also the first items that you sell. So, if you have 100 t-shirts in stock and you sell 50 of them, then those 50 t-shirts will be accounted for in your calculation even if they were actually purchased at different times throughout the year.

Worried about which method is best for your business? Don't be - just pick one and stick with it. As long as you're consistent from one year to the next, either method will give you an accurate representation of your business's finances. 3. Become an authority

Blogs are a great addition to your site as they give you the ability to create authoritative content. They also help you establish credibility and become an expert in your field. Moreover, they provide you with an opportunity to build an audience that will help push your company’s brand recognition.

How Do You Feel About Measuring Your Cost of Goods Sold?

As a small business owner, it's important to have a good understanding of what goes into calculating the cost of goods sold. While it may seem like a daunting task at first, once you get started it's really not all that complicated - especially if you use one of the many accounting software programs that are available today. And remember - understanding your costs is critical to ensuring profitability and long-term success for your small business!

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