Small business owners have a lot on their plates. They need to wear many hats, but they also need to keep a close eye on the bottom line. One of the most important figures for small businesses is the cost of goods sold (COGS).

This figure tells you how much it costs your company to produce or purchase the products or services it sells. It’s essential to know your COGS to determine whether your business is making a profit.

Various methods can be used to calculate COGS, so it’s essential to understand them all. This article will discuss the different ways to calculate COGS and explain why it’s so important for small business owners to know the exact cost of these products/services. Staying on top of your small business finances is the ultimate way to long-term financial success.

What is the cost of goods sold (COGS)?

The cost of goods sold (COGS) is the direct cost of producing or purchasing the products a company sells. This figure includes the cost of the materials used in production and the cost of labor. It’s important for business owners to calculate their COGS to determine whether they’re making a profit on their products. If the COGS is higher than the selling price of the product, then the business is losing money on each sale.

How to calculate COGS

The most common way to calculate COGS is by using the direct method(items that touch the product or service).

This method includes all of the direct expenses associated with producing or purchasing a product. These expenses can consist of the cost of materials, labor, shipping, and handling.

Another common way to calculate COGS is by using the indirect method(items that may look invisible from the sidelines).

This approach considers all of the indirect expenses associated with producing or purchasing a product. Indirect expenses can include things like rent, utilities, and marketing costs.

It’s important for business owners to understand both of these methods to determine the best for their company.

Each method has its advantages and disadvantages, so it’s important to choose the one that will give you the most accurate picture of your business’s profitability.

Why is COGS so important for small business owners?

To maintain a successful small business, it’s crucial to understand the importance of the Cost of Goods Sold. This figure tells you how much it costs your company to produce or purchase the products it sells and is essential to determine whether your business is making a profit. There are various methods that can be used to calculate COGS, so be sure to understand them all. This article discussed why COGS is so important for small business owners and explained how to calculate it using direct and indirect methods.

There you have it. The cost of goods sold is essential for small business owners to understand. It tells you how much it costs your company to produce or purchase the products it sells and is necessary to determine whether your business is making a profit. Be sure to consult with an accountant if you have any questions about which method is best for your company.

What else would you like to know about staying on top of your business finances? Please share them with us in the comments below! 

Do you have a question about business finances that you would like answered? Send us an email at info@aspenriverfinancial.com, and we may feature your question in a future blog post!

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