You Can't Know Your Profit Without Knowing Your Cost of Goods Sold, and Most Owners Guess It
If your business sells products, the most important number on your profit and loss report is not revenue. It is cost of goods sold (COGS), because it decides how much of each sale you actually keep. Many owners work from a rough percentage in their head and never check it.
What COGS Is
COGS is the direct cost of the products you sold during the period. It is built from three parts:
Opening stock + purchases during the period − closing stock = COGS
That formula is why stock matters so much. The value of what is left on your shelves at the end of the period directly changes the cost you report for what you sold.
What Belongs in It
- The purchase price of the stock you sold
- Freight and delivery costs to bring the stock in
- Import duties and similar costs, where they apply
- For manufacturers, direct materials and direct labour in making the product
Rent, marketing and office wages generally sit in operating expenses, not COGS. Putting them in the wrong place distorts your margin figures, even where profit is unchanged.
Where Owners Get It Wrong
- Guessing closing stock. An estimated or missing stocktake changes COGS and profit by the same amount. It also changes your tax.
- Ignoring slow or damaged stock. Stock you cannot sell may not be worth what it cost. Writing it down properly is part of getting the number right.
- Leaving out freight and duties. Your real product cost is higher than the supplier's invoice.
- Not reviewing supplier price rises. A small cost increase that is not passed on quietly cuts your gross margin on every sale.
What to Do
- Do a proper stocktake at least at year-end, and consider more often during the year.
- Work out your gross margin each month: (revenue − COGS) ÷ revenue.
- Compare it with last month and last year, and investigate any movement.
RBizz reconciles stock and COGS so your margin figures reflect what is really happening. Get in touch if your gross margin is an estimate rather than a number.
