![]() The first place you should look is your current suppliers. So instead of spending $5 to produce one watch, how do we get that number down to $3? When we talk about lowering COGS though, we mean producing your product for less. How to Lower Your Cost of Goods SoldĪs we mentioned earlier, your COGS will naturally increase as your business grows. How exactly do you lower your COGS without producing fewer products? Let’s take a look. This means that this company has 20% of its monthly revenue to spend on marketing, payroll, R&D, and any other operating expenses.Īs you’ll see in the chart below, the less this company spends to produce its products, the higher their gross margins will be (assuming their revenue stays consistent). When you plug that number into the Gross Margin formula, you get Say a company has $50,000 in monthly revenue. This is why companies are always looking for ways to produce their products for less. The less it costs you to produce your product, the higher your gross margins will be, which means you have more money to spend on growth. It’s essentially your gross profit expressed as a percentage. Your gross margin is the amount of revenue you retain after subtracting the total cost to produce and sell your product. The relationship between your COGS and revenue determines your gross margin. The relationship between your COGS and revenue plays an important role in your ability to grow, but more on that in the next section. This is why COGS appears at the top of a Profit & Loss statement or income statement, directly under revenue. You can spend more or less on them without impacting your production capabilities. Operating expenses (OPEX) like sales and marketing, G&A, and R&D are the expenses that go towards running and growing your business. Keep in mind, COGS is different from your other expenses. So in your third month, you sell 3,000 watches, making your COGS $15,000 ($5×3,000). But as word of mouth spreads and you start marketing, more people buy from you. If it costs you $5 to make one watch and you sell 1,000 watches in our first month, the COGS would be $5,000 ($5×1,000). Going back to our watches example, the more watches you sell, the more materials you need to buy in order to produce the supply. Of course, this can vary depending on your business model. Typically, COGS will grow with your revenue because theoretically, the more you’re selling the more you’ll need to spend to produce the product/service. Track and forecast your COGS with Finmark! If you’re a watch retailer (meaning you buy watches and resell them) your COGS would include the amount you spend to buy each watch you’re selling.įor SaaS companies, COGS might include the hosting expenses for your software or any APIs you pay to use in your product. ![]() The expenses that go under the COGS category depend on the type of business you have.įor instance, if you manufacture watches, your COGS would include all the parts that go into creating the watches. In this article, we’re going to break down everything you need to know about COGS.Ĭost of Goods Sold (COGS) refers to the direct costs associated with producing your product or service. Whether you’re a manufacturer, online retailer, brick and mortar shop, or even a software company, there are certain expenses involved with producing your goods and services. That’s what cost of goods sold (COGS) is all about.
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