![]() It Can Help You See How Efficiently You Produce What You Sell Knowing what you’re on the hook to pay every single month will remind you of your break-even point-the amount of money you need to make to cover your costs. It’s really important to have a handle on these expenses. When you separate out your COGS, it makes it easy to see what your total indirect costs are. There are expenses that you’ll have to pay each month regardless of whether you earn a dollar. If the amount you need to sell is unreasonably high, your price might be too low. As a result, you can estimate the volume you’ll need to sell to cover your other costs. You’ll see exactly how much it costs to actually sell your product or service. How do you know if you’re charging enough to cover your costs? Knowing your COGS can help. Price it too low and you’ll have trouble breaking even. Price it too high and you might have fewer customers. It Helps You Make Accurate Pricing Decisions Tracking to see whether your gross profit margin increases or decreases over time can help you get a sense of the financial health of your business. That gross profit margin needs to be high enough to cover all of your indirect expenses, like marketing and salaries. Your gross profit margin tells you how much money you have remaining after paying for the product that you sold. Here’s why: It Can Be Used to Calculate Gross Profit MarginĪn important KPI for small business owners to track is their gross profit margin and you just need two numbers to calculate it: revenue and COGS. Taking time to sit down and calculate your COGS might fall to the bottom of your priority list.ĭon’t skip past calculating and understanding your COGS. There’s a lot to know when it comes to your financials, and you might be tempted to skip past a lot of it because you’re busy running a business. Ask yourself, “Would you have to pay this expense whether or not you sold anything?” If you’d need to pay for it regardless, it’s probably not a COGS. If you’re looking at your expenses and you’re still not sure which would be classified as a COGS, there’s a simple way to work through it. No matter how much you sell, your rent won’t change. This includes things like rent, utilities, and marketing costs. Ending inventory: Determine the total value of all items in inventory at the end of the year.Unlike COGS, operating expenses are indirect costs and don’t vary based on how much you sell.only for the area where the products are being manufactured or assembled. Other costs: This includes indirect labor, shipping containers, freight on materials and supplies, and expenses for rent, light, heat, etc.Cost of materials and supplies: These costs must be directly related to making the product.It doesn't include payroll costs for administrators or employees in sales, marketing, finance, or other areas. Cost of labor: This is your cost for employees who work directly making products from raw materials and parts.If you are making products, you'll need to include the total cost of all raw materials and parts you bought during the year. Subtract any products you took out for personal use. Cost of purchases: Next, get a total of all the products you bought during the year and that you placed in inventory to sell.If it's not the same, you must include an explanation of the difference in your tax return. This should be the same as the inventory at the end of last year. Beginning inventory: This is the total cost of all the products in your inventory at the beginning of the year. ![]() ![]() ![]() You must include an explanation of any changes. Check with your tax preparer if you have changed your method of determining quantities, costs, or valuations. If you use the cash accounting method, you must value inventory at cost. Valuation method: Designate whether inventory is valued at cost, lower of cost or market, or other.
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