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Understanding Cost of Goods Sold
The account on your income statement called Cost of Goods Sold can be confusing to non-accountants. In this article, we’ll attempt to de-mystify it and explain how it works.
Cost of Goods Sold is an account in your Chart of Accounts that is a very special type of expense. It is the amount of direct costs of items that were sold by the company. It is related to inventory, and it helps to see the flow of transactions to understand the big picture.
When you purchase an inventory item for sale, it’s considered an asset (not an expense yet) in your company. When you sell an inventory item, the asset is reduced and the Cost of Goods Sold account is increased, moving the item from an asset to an expense. It’s no longer an asset once it’s sold, and the cost of the item sold reduces your profit and is expensed into the Cost of Goods Sold account.
Some accountants will abbreviate the Cost of Goods Sold account to COGS, and you might hear them call it that.
In the case of wholesale and retail businesses, the cost of goods sold is the amount that was paid for the inventory items to be sold. In the case of a manufacturer, the costs can include the cost of raw materials, labor to produce the item, and sometimes additional allocations of other related costs. Construction businesses may have a Cost of Construction account or Contract Costs instead of COGS. Service businesses will typically not have a balance in the Cost of Goods Sold account. If they do have direct costs, the costs are often coded to a Supplies account under expenses.
At any point in time, the cost of items you purchase are in two different accounts:
- The unsold items are reflected in the asset account, Inventory, on your Balance Sheet report.
- The sold items are reflected in the Cost of Goods Sold account, on your Income Statement report.
It’s important that the Cost of Goods Sold balance is accurate, because there are many good things you can learn from it when you compare it with inventory. You can learn how fast your inventory is selling, and you can determine your gross profit margin.
If your inventory purchases have not been coded correctly, you can take inventory and arrive at the correct cost of unsold items. If your physical inventory does not match your books, your accountant can make a correcting entry between Cost of Goods Sold and the Inventory account so that both of them are accurate.
If you have further questions about the Cost of Goods Sold account, feel free to reach out any time.
Mid-Year Review
Can you believe that half of 2019 is gone already? That means it’s a great time to take stock of how your business has done for the first half of 2019 so that you can meet your financial goals for the entire year.
On Track for Sales
Are you on track to make your 2019 revenue number? The first step is to check your 2019 budget numbers for total revenue. (Don’t have a budget? – Check with us; we’d be delighted to discuss that service with you.)
Next, get your Income Statement for June 2019 Year-to-Date and check the revenue figure. Are you on track with your budget, or are you halfway there revenue-wise, accounting for seasonality? If so, pat yourself on the back! If not, what promotions will you put in place to boost your growth for the rest of 2019?
On Track for Profit
Looking at the same Income Statement, check your net income figure. Are you on track with what you planned? If so, great! If not, the reason is simple: it will be either lower sales than expected or higher expenses than expected.
If your expenses are too high, you’ll need to drill down into each of your expense accounts, including cost of goods sold, to see which ones are higher than expected. Were there some unanticipated costs? Does your pricing need adjusting? Do you need more volume to cover your costs? This is where we can help you with an analysis of where your opportunities are to increase profit.
On Track for Cash
One more place to look is your cash balance. It can be uncomfortable when you are running short of cash for your business. If your balance is lower than you’d like it to be, it could be because of some of the factors mentioned above. It could also be because you just purchased an asset like a truck. If you need help with improving your cash flow, that’s another thing we can help you with.
Mid-Year Review
This mid-year review can help you head off any small problems before they grow into big ones throughout the rest of the year. And it can keep you on track so you can meet your 2019 business goals.
Five Timeless Tips to Improve Customer Service
Having repeat customers is essential to many businesses, and the key to keep clients coming back is to provide them with great customer service. Here are five ideas to rate your business’s savvy when it comes to serving customers well.
1. Make a great first impression.
When customers make a purchase from you, make them feel great about it by sending them a series of indoctrination emails. Congratulate them on the purchase, let them know how to get the most out of their new purchase, and encourage them to connect with you on social media and your mailing list.
2. Measure response time.
How fast do you answer prospect and customer questions? Social media has changed the game. Customers that reach out via social media platforms, their phones, chat, or messaging apps expect an immediate answer. Facebook even gives a badge to businesses who respond quickly and consistently.
Not only do businesses need to monitor messages coming in from a record number of places – email, phone, web forms, chat, social media, and more – they need to respond faster than ever.
Without measuring your response time, it’s hard to know how you’re doing, so putting measures in place is the first step to improving this customer service metric.
3. Publish clear policies.
Good customer service starts with setting clear expectations. Before a customer buys from you, they should be able to know what your return policy is in case something goes wrong. Some of the policies that should clearly be published online as well as at all customer-facing business locations include:
- Returns policy: If the product or service is not as expected, can the customer obtain a refund? Is there a re-stocking fee? What about shipping? Cash back vs. store credit?
- Shipping policy: Most people expect free shipping these days. They will want to know what it costs and how long will it take to get the item.
- Terms of service: Are there any limitations to the product? Or legal items that need to be communicated?
- Privacy policy: All clients will be giving you private customer data. They will want to know if it’s secure, if you share it with anyone, and if you are compliant with laws like GDPR (Europe), the CAN-SPAM act (US), or CASL (Canada).
4. Encourage feedback.
Your best ideas for new products and services can come from your customers. Ask for feedback by sending customer satisfaction surveys and requests for testimonials and reviews. Read what customers have to say about your service so that you can make improvements as needed.
5. Check your ego at the door.
As small business owners, sometimes we need to be humble, especially when things go wrong. Be generous with apologies to customers; it will go a long way toward improving customer relations. If you’re at fault, admit it and make it right with the customer. Even if you’re “right,” find a way to explain to the customer so that they feel good about you and your business. Delivering great customer service can be a huge competitive advantage for your business. How does your business stack up against these five ideas? Try them, and watch your revenue grow.
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About Mandy Cohen
