What are COGS?
What are COGS (Cost of Goods Sold) and why are they important to your business?
First of all, a couple quick definitions:
Cost of Goods Sold - Your cost of goods are the direct costs related to creating and selling a finished product to a client.
Gross Profit - When cost of goods are deducted from the revenue generated by the product sales, you have calculated your gross profit.
Revenue minus Cost of Goods Sold = Gross Profit
For an interior design business, COGS may look like this:
Commission to salesperson who sold the client
Cost of furniture and accessories at wholesale for the client job
Cost of supplies and materials for an installation (i.e. tile and grout purchased for the client’s project)
Cost of labor (professional services, i.e. tiling a floor for a client)
Although every aspect of your business is geared toward providing for your customer, there are items that are not considered COGS. Instead, these are indirect costs.
Indirect costs not included in Cost of Goods Sold include:
Meals while at a client site
Office expenses
Utilities
Administrative employee salary
Training
Why should I care about my COGS?
COGS are deductible expenses. The more deductible expenses you have, the lower your year-end tax bill will be.
Understanding your cost of sales will help you to determine if you are charging enough mark-up on the products you sell.
Separating COGS from indirect costs will show you what your general operating expenses are. Is it time to put your business on a budget to increase your net income?
Do you need help determining your Cost of Goods Sold vs. your indirect costs? Do you know what your gross profit is? If you need help with bookkeeping and determining the health of your business we are here for you. Contact us today for a free estimate for professional bookkeeping.
This post is meant for informational and educational purposes. It is not tax, legal, or financial advice. As always, Business by the Book recommends that you consult with your CPA regarding any tax questions.
