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June 30, 2022

As a business owner, you want to always be aware of your company’s financials. After all, numbers are the language of business and they can tell you a lot about how your company is performing. One of the most important metrics in any business is the net sales minus cost of goods sold (COGS). This number tells you how much profit your company is making from its operations.

Net Sales Minus Cost of Goods Sold

Net sales are the revenues generated from the sale of goods and services after accounting for all other expenses. Net sales minus cost of goods sold is derived by subtracting the cost of goods sold (COGS) from gross sales.

This means that the COGS is used to derive gross profits while all other company expenses after the COGS are used to determine net profits.

Let’s assume a dog collar company wants to prepare its income statement. The company first needs to add all the expenses it incurs when making dog collars.

This includes the cost of materials like nylon, thread, and fabric glue used in sewing the dog leash. The cost of labor, employee payroll, and electricity for running the assembly line is also added to the COGS.

Assume that all costs used in creating the dog leashes are $100,000 annually. The $100,000 is the cost of goods sold (COGS).

Assume all costs associated with producing dog leashes are $100,000 per year. The $100,000 is the cost associated with the production of the goods.

To calculate gross profit, the company looks at total revenue and subtracts any other business costs.

If the total revenue for the company is $400,000, then the gross profit would be $300,000.

If there are additional costs such as administrative, sales, or banking fees, these will be deducted from the gross profit to calculate the net sales revenue.

In this example, if these costs totaled $50,000, then the net sales revenue would be $250,000.

What Is COGS?

The cost of sales or COGS is the total cost of manufacturing or purchasing goods for selling.

COGS is an important business expense to take into account when calculating profit margins on products.

The acronym COGS stands for “cost of goods sold.” It can be found underneath “Sales” or “Income” on an Income Statement.

net sales minus cost of goods sold (Source)

COGS and Taxes

Cost of goods sold (COGS) is a tax-reporting requirement for companies that make and sell products or buy and resell goods.

By calculating COGS, businesses can write off this expense, which in turn lowers the total amount of taxes they owe.

A business must figure out the cost of its stock at the start and end of every tax year. This difference is the Cost of Goods Sold.

A higher COGS means that the company does not have to pay as much in taxes, but also means that the company is making less money.

To maximize profit, the cost of your goods should be as low as possible.

Net Sales vs. Cost of Goods Sold

Net sales and the cost of goods sold are two important items on a company’s income statement. They help establish the company’s profits and efficiency when creating products and services.

Businesses must know how much revenue they generate, how much their products cost to make, and how much overall profits they earn.

Importance of COGS in business

So, why is the cost of goods sold so important to your business? Well, your COGS can tell you a lot of information, including:

  • What your margins are for a certain period
  • Do you need to change your pricing
  • What areas you are spending too much on

Profits

Knowing your gross profit margin allows you to figure out your net margin, which is your profit after deducting all business costs.

Knowing your business’s profits can help you make financial decisions, seek financing, and determine if you need to make adjustments.

Pricing

Finding the right price for your products is one of the most important tasks you have as an entrepreneur. Just like in the story of “Goldilock and the Three Bears,” you need to find the right price that is neither too high nor too low.

If you don’t take action now, you could miss out on potential profits.

If you set your prices too high, you’ll likely see less interest. If you set them low, you won’t be making enough.

To figure out the right price to charge, use the COGS metric. This can help you set a price that leaves you with a decent profit.

You can control when prices for a product need to be increased.

Let’s say your COGS for a product is $10. To make a profit, you need to charge more than $10 for this product.

If you price it for less than $10, you will not turn a profit.

Costs

Your COGS can tell you if your production cost is too high. If your production costs are too high, you can adjust your pricing, cut down on expenses, or find a new supplier.

Conclusion

If you want to ensure your business is profitable, it’s important to keep an eye on your net sales minus cost of goods sold. This number will tell you how much profit your company is making and help you make decisions about where to allocate resources. By understanding this key financial metric, you can set your business up for success in the long run.

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