4/4/2024
11/4/2024
Focus on COGS or cost of goods sold
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The cost of sales and the cost of goods sold (COGS - Cost of Goods Sold) is an important indicator that takes into account the various expenses incurred by a company to make sales.
The COGS can be used to answer the question "how much did the goods sold to a customer cost?" and thus gives a good idea of the company's performance and margins. Depending on the Business ModelsDepending on the business model, there are different types of expenses to be included in the cost of goods sold.
What are COGS and how do I interpret them? interpret ? How to calculate thisindicator ? Is it possible tooptimize in 2024 the cost of goods sold? We answer all your questions in this article.
What is COGS?
Definition
The cost of goods sold (COGS) corresponds to the direct costs of production and storage of goods sold by a company.
This indicator includes all expenses directly related to the sale. For example, the purchase price of the raw material, the costs of transformation into the product and the costs of packaging are taken into account. We must not forget to take into account the expenses related to the storage and the transport of products or goods.
COGS does not include indirect expenses such as overhead related to general business operations. This excludes rent payments, marketing expenses, accounting and legal fees, and management salaries. The cost of goods sold is reported on a company's income statement.
Why calculate COGS?
COGS thus includes the cost of materials and labor directly used to create the good sold to customers. It excludes indirect expenses, such as distribution costs and sales force costs.
This indicator is very important to guide the management of companies because it gives a good picture of the marginal costs directly related to sales and their impact on margins.
COGS can indeed allow the company to understand the evolution of labor costs, raw material supply, and more broadly all tasks involved in the creation and distribution of goods sold.
The items to be included in the cost of goods sold differ according to the type of business being considered. For example, in the case of a manufacturing company, the main costs are raw materials, components and other direct expenses required to assemble the products.
How to calculate COGS
To calculate the COGS of a company over a given period, the following formula must be followed:
Cost of Goods Sold (COGS) = (beginning inventory + inventory purchases) - ending inventory
Beginning inventory is the market value of your remaining inventory from the previous period. For example, the inventory on the balance sheet for the year 2021 is the beginning inventory for the year 2022.
Inventory purchases represent the monetary value of inventory purchases made during the year. These may be either raw materials or finished goods inventories.
Finally, ending inventory is the dollar value of the inventory remaining at the end of the accounting year.
How to optimize COGS?
The more you reduce your cost of goods sold, the more you increase your profit margins. No matter what type of business you run, it's in your best interest to find ways to reduce your COGS.
Compare suppliers and play the competition
The price of goods is one of the most important items in the calculation of the purchase price of goods sold.
So, when using suppliers, consider comparing prices and qualities between several suppliers and compete for the best deal.
Buy in bulk whenever possible
The more you order in volume, the more attractive the prices can be. It can be interesting to buy in large quantities and get discounts or preferential rates from certain suppliers.
Such a strategy makes it possible to reduce the cost of purchasing raw materials or finished products and thus to reduce inventory. However, one must be careful not to order in excessive proportions in order to keep storage costs as low as possible.
Have favorable payment terms
Negotiating and having favorable payment terms with suppliers can be very beneficial to the cost of goods sold. This may include discounts (a commercial gesture used to promote prompt payment of invoices).
More broadly, negotiating and obtaining from your suppliers the possibility of staggered payments allows you to optimize your cash flow and artificially reduce COGS.
Purchase less expensive raw materials or finished products
If it is possible to do so without compromising the quality of the goods sold, then finding cheaper raw materials or finished goods is a good solution to reduce the cost of purchasing the goods sold.
How to manage your COGS with Karmen
Solutions to the cost of goods sold
As we have seen, COGS is an essential indicator for the management of the company. It is advisable to optimize this cost related to the purchases of the sold goods in order to improve its margins and its profitability.
For larger amounts, you can finance your COGS with the help of Karmen.
Karmen is a French start-up founded in 2021 that offers a simple, accessible and non-dilutive financing solution. The company has just raised €50 million in debt from Fasanara Capital.
To obtain financing from Karmen, an online form is to be filled in so that Karmen can be integrated in read-only mode with your company's various tools: invoicing, accounting, bank accounts (open banking).
Obviously, this data collection is fully secured and encrypted so that the confidentiality of the data is not damaged.
This allows them to have a real time and 360° view on the financial health of the company and thus to give an answer of eligibility within 48 hours and to offer the best financing offers (if eligible).
Note that there areno application or registrationfees required by Karmen. Forget about administration fees or prepayment penalties with Karmen.
How does COGS funding work with Karmen?
With Karmen, the amount of financing can be up to 40% of the company's annual revenue (ARR) and this solution offers a line of financing that increases as your sales grow.
Karmen is a non-dilutive financing solution that helps digital businesses access instant growth capital. Instead of waiting for online or subscription revenues to be cashed in month after month, Karmen unlocks the annual value of these revenues, right from the start. Karmen's solution gives digital businesses access to instant growth capital, within 48 hours, to finance their growth expenses (customer acquisition, marketing, recruitment, technology and more).
Karmen supports businesses in their long-term growth with additional financing tranches every 2 to 3 months. This non-dilutive financing is the perfect solution for financing the cost of goods sold and managing your business with peace of mind.
Each tranche of funding requires repayment over a period of 4 to 12 months and this repayment cycle does not begin until 30 days after the first grant of funds.
You can now test your eligibility for FBR in just a few clicks and get started by filling out the eligibility form (see above).
Conclusion
Thus, the cost of goods sold (COGS) corresponds to the direct costs of production and storage of goods sold by a company.
This indicator is very important to guide the management of companies because it gives a good picture of the marginal costs directly related to sales and their impact on margins.
COGS can indeed allow the company to understand the evolution of labor costs, raw material supply, and more broadly all tasks involved in the creation and distribution of goods sold.
If it's possible to optimize the cost of goods sold to improve margins and profitability, it's also possible to finance your COGS with the help of Karmen.
