Running an online business can be exciting! It also means you've got to stay across your numbers. One of the big ones is "Cost of Goods Sold," or COGS for short.

So, what is the cost of goods sold? Simply put - it's the total cost of making or getting the products you sell. This includes everything from the raw materials to the labour involved in getting those products ready to sell.

Let's break it down further, shall we?

Understanding the cost of goods sold is important for anyone selling products online. It helps you keep track of what it costs to produce or purchase the items you sell, giving you a clear picture of your business's financial health. Knowing your COGS allows you to make informed decisions about pricing, budgeting, and forecasting. It's a piece of the puzzle for managing your profit margins and helping your business remain sustainable.

One of the reasons to pay attention to COGS is to get your pricing strategy right. By knowing how much it costs to produce or buy your products, you can set prices that cover your costs and bring in a profit. If you don’t consider COGS, you might end up pricing your products too low, eating into your profits, or too high, scaring off potential customers. Striking the right balance is key to attracting buyers while keeping your business profitable.

Another reason to understand COGS is that it can help you when it comes to tax time. Accurately calculating your COGS means you can properly report your earnings, which can affect how much tax you owe. Keeping detailed records of your costs helps you're reporting, which can make tax season smoother and potentially save you money. Good record-keeping and understanding your COGS are all part of running a smart, efficient business.

Don't worry, working out your COGS isn't as scary as it sounds!

Let's say you sell handmade candles. At the start of the year, you had $200 worth of candle supplies (beginning inventory). During the year, you bought another $300 worth of supplies (purchases). At the end of the year, you had $50 worth of supplies left over (ending inventory).

So, your COGS would be: $200 + $300 - $50 = $450

That means your candles cost you $450 to make this year.

To figure out your COGS, you need to consider all the direct costs that go into making your products. Let's break down what usually falls under COGS:

This covers the raw materials you use to create your products. Think of things like:

This is the cost of paying the people directly involved in making your products. For example:

Here are some common questions about COGS and clear answers to help you out.

Yes, packaging can be part of COGS. If the packaging is necessary for the product to be ready for sale, then its cost should be included in COGS. This means any materials you use to package your products, like boxes, wrapping, or labels, are part of the cost of getting your product ready for your customers. However, promotional or shipping packaging typically isn't included in COGS.

Shipping costs can be a bit tricky. Generally, the cost of shipping the products to your warehouse or store, known as freight-in, is included in COGS. This is because it’s part of the expense of getting the goods ready for sale. However, the cost of shipping products to your customers (freight-out) is usually considered a selling expense and not part of COGS. Keeping these distinctions in mind helps you calculate your costs and manage your pricing strategy.

Calculating COGS for digital products can be different from physical products, but it’s still important. For digital goods, COGS might include expenses like hosting fees, software licences, or the cost of digital content creation. Even though there are no physical materials, the costs associated with creating and maintaining digital products are part of your COGS. By tracking these costs, you can get a better understanding of your profit margins and make informed business decisions.

Understanding your Cost of Goods Sold is an important part of running a successful online business. It helps you price your products right, and ultimately, understand how profitable your business really is.

As an online seller, you're always looking for ways to reach more customers and grow your business. Selling on Amazon can be a great way to do just that. It gives you access to a great audience and ready-made tools to help you manage orders and shipping.

Remember, keeping a close eye on your COGS - whether you're selling on Amazon or going it alone - gives you a solid foundation to make smart decisions and grow your business.