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How do I understand Cost of Sales, or COGS on the P&L statement?

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  • David Krauskopf Fred Glave
    www.scoredc.org  

    David Krauskopf is an entrepreneur experienced in starting, financing and growing several companies with direct experience in travel, hospitality, software, computer, and retail industries.   His specialties are in business planning, marketing (internet particularly) and financial management.  David was the general manager of Apple Computer in Russia from (1993-1999) and owned the exclusive representative for Apple Computer in Russia and the Ukraine.  He founded a printing and press room solutions company in Russia in 1996, and these combined companies in 2007 had over $300M in sales revenue.   David helped start and was on the advisory board of Travelpost.com that was acquired by Sidestep in 2007.  In 2000, David developed and now owns Hamanasi Adventure Resort (<a>www.hamanasi.com</a> ), a high-end boutique resort in Belize, Central America.  This resort has 70 employees, high operating margins and is currently ranked number one in Belize and Central America by the hotel review web site TripAdvisor.com.  Mr. Krauskopf lives in Northern Virginia, is an angel investor with New Vantage Group (<a>www.newvantagegroup.com</a>) , David is a volunteer SCORE (<a>www.score.org</a>) business counselor partnering with the Fairfax County Economic Development Authority and for two years has been an Assistant Wrestling coach at Langley High School.  David holds an MBA from the Kellogg School of Management (2005) and a B.S. degree in Management from Miami University. 

  • How do I understand Cost of Sales, or COGS on the P&L statement?

     

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    <p>Speaker: How do I understand Cost of Sales or COGS on the P&L statement?</p><p>Fred Glave: COGS stands for cost of good sold and it simply is the estimate of the cost of the product that you are going to sell and it is made up by including the cost of the material and the cost of the salaries of the people that are going to build the product or otherwise provide the service if you are in a service based business. In our example that we generated the four, the category one product, we had sales of $36 and in fact we use an example here that the COGS for that category is $20. If you subtract one from the other, you get a profit for to particular category and product of $16 in the month of June. Now, control of COGS is an extremely important for profitability. So you want to examine each element in detail. How much labor does it take? What is the cost of the material? How much are you going to pay for shipping, packaging, maybe even sales commissions? You also want to be conservative in this area, because if you under price your cost of your good sold then if you underestimate the cost of your gold sold then you may under price that particular item in the marketplace and then you are not going to make very much money if any on that particular item. So you want to do that again for each category of product and for each month of the year. When you are all done, you take the actual sum of your COGS, your cost of good sold in each month and subtract it from your revenue and you have the profitability of your business in that month. So for in our example that we showed to you in the first month, the profitability is $44, second month it's $81 and in the third month it's a $131. 1</p>

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