![]() ![]() It’s crucial to have all of this information ready for your accountant - or for a tax professional to help you understand what you need to do if you manage your own books. Likewise, there are different ways to do the COGS calculations, including: The time period for calculating COGS depends on the type of business you run and how you do your accounting. To calculate your cost of goods sold, you first need to understand the total amount of inventory and other relevant costs (if you’re a manufacturer) you regularly spend for the products you sell on a monthly, quarterly, and annual basis. When doing COGS calculations, business owners must itemize the inventory they purchased (within a set time period) to manufacture or sell their products to customers.ĬOGS plays a crucial role in determining those factors, as well as in managing cash flow and finding cost savings.įor help with calculating your break-even point, read: “What is break-even analysis.” You might also want to learn more about cash flow forecasting for small businesses, and understand how to avoid cash flow problems. Why service-based small businesses don't use COGS It’s always best to check with an accountant or tax expert to learn what direct and indirect costs should or shouldn’t be included in your COGS calculation. These costs include line items like your marketing and product distribution expenditures. Likewise, you do not need to include anything in your COGS calculations that goes into your cost of revenue, meaning the total amount you invest to sell products to customers. If you are a small business owner who doesn’t manufacture your own products, your cost of goods sold typically would not factor in your indirect overhead costs (or operating expenses) incurred to run your business.įor example, when you purchase inventory from other vendors for resale, your indirect costs might include the monthly cost to rent your storefront or to keep the lights on.
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