![]() ![]() It doesn’t apply to the stock you still have on hand. Most notably: The cost of goods sold only includes the inventory you’ve sold to customers. While sometimes used interchangeably, there are several differences between the cost of goods sold (COGS) and inventory. The difference between the cost of goods sold and inventory Taxes (tariffs or duties) that add to the price of purchasing products The value of the inventory you haven’t sold yet Legal or other general administrative costs of running a businessįreight from your supplier to a 3PL warehouse ![]() Labor used to produce and assemble products or packaging ![]() Overhead costs such as rent, utilities, insurance, and office supplies ![]() Raw materials or parts to assemble products or packaging Labor used to pick, pack, and ship products once they’ve been sold Sales and marketing expenses, including Shopify, Amazon, or any other software feesĭirect labor costs used for shipping products to the warehouse Indirect costs that do not count toward COGS But because these costs are not directly associated with producing products, they should be excluded. This amount is sometimes referred to as the “wholesale” price of inventory, which covers the total costs of manufacturing and receiving products.įrequently, brands will mistakenly include their operating expenses within their COGS. The expenses included in your cost of goods soldįor ecommerce stores, the cost of goods sold includes all of the direct costs associated with producing or acquiring your products for resale. This means more cash flow and a better opportunity to grow sustainably as a brand. Because the lower your company’s COGS, the higher your margins and revenue. That said, your cost of goods sold is also critical in understanding gross profit margins. These expenses are only deducted when figuring out your gross profit margin. However, COGS does not include indirect operational costs (like warehousing, marketing, or shipping). This inventory metric includes the cost of materials and labor costs used to manufacture products and get them to your warehouse or fulfillment center. It’s not as shiny, but it’s just as (if not more) effective.Ĭost of goods sold (COGS) is the direct cost of producing your company’s products. Very few focus on the fundamental principle of lowering your cost of goods sold alongside the idea of increasing revenue. Both lend themselves to plaster over the below-the-line cracks. If you google “How do I make more money for my business,” most answers detail enticing marketing strategies and how-to steps centered around growth initiatives. And for many, getting more exposure (marketing), selling more products (sales), and upping turnover (revenue) become all too shiny obsessions.Īfter all, a business isn’t a business without money it’s a hobby, right? You have to focus (at least some of the time) on driving up revenue to increase net profits.īut what if we put too much emphasis on the shiny ways to increase revenue and not enough on the fundamental best practices? Meaning, what if our pursuit of top-line growth is plastering over the cracks of our below-the-line inefficiencies? The fundamental foundations of running a business are easy to overlook once you are in the thick of it. ![]()
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