small business expenses – GoForth Institute Blog

How to calculate your business’ cost of goods sold (COGS)

Cost of good sold (COGS) is an important figure to know. Cost of goods sold is the price that your business paid to acquire the products that you’ll sell to your customers in retail/wholesale businesses, or the cost of the raw materials, labour and supplies in manufacturing businesses.

Why should you know your business’ cost of goods sold? It’s important to know so that you can better understand your business – your profits, and where you might be able to improve efficiencies.

How to calculate cost of goods sold

Most small businesses use the following formula to calculate their COGS expense:

Value of goods inventory at the beginning of the period
+
Value of any goods purchased for resale during the period
–
Value of goods inventory at the end of the period
=
The cost of goods sold during the period

And there you have it! Calculating your cost of goods sold is another tool you can use to help your small business succeed.

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All about small business operating expenses

One type of cost you need to estimate is called operating expenses. These are incurred by a business no matter how much product is sold. These are regular expenses like rent, salaries, insurance premiums, advertising and marketing costs, travel, interest, and miscellaneous expenses. In other words, the day-to-day costs you’ll expect to see when running your business.

You’ll need to estimate operating expenses in order to get a complete profit picture of your business. Operating expenses can be calculated per day, month or year.

Close your eyes and imagine you’re opening a flower shop and you want to figure out your operating expenses. Now, open your eyes and behold your sample estimated operating expenses:

Store rent (2,500 sq. ft. @ $30/sq. ft./year) $75,000
Florist salaries $60,000
Part-time florist salaries (x2) $50,000
Advertising $12,000
Supplies $24,000
Telephone/internet $1,200
Insurance $6,600
Utilities $3,600
Travel $1,800
Miscellaneous $12,000
Total annual operating expenses $246,200

Of course, you can’t be sure of actual costs until you’ve actually chosen a location, developed your marketing strategy and opened your doors. For now, though, this rough estimate of operating costs is enough to see whether it’s clear sailing ahead, or trouble brewing.

When estimating your start-up expenses, operating expenses and cost of goods sold, be realistic. Make sure to estimate all costs as well as the time you’ll have to pay those costs before your business starts making money. And try not to get carried away with your start-up cost estimate — think of only what you’ll need to spend to get to your opening day.

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How to figure out cost of goods sold (COGS)

cost-of-goods-sold Along with start-up expenses, one type of expense you’ll need to figure out when starting your small business is called cost of goods sold, or COGS.

What is cost of goods sold?

For retail or wholesale businesses, your cost of goods sold is the price you paid to acquire the products that you’ll sell to your customers – in other words, the direct costs of what you sell.

For a manufacturing business, your COGS includes the cost of the raw materials, labour and supplies used in the manufacturing process. Your labour costs include the process of fabricating the raw material into a finished product ready for sale. So, for example, the cost of turning pieces of leather into functioning handbags.

For a pure service company, there usually isn’t any COGS. You’ll make your income from service fees instead of the sale of products — you sell the intangible. However, most businesses sell both products and services. For example, a hairstyling business sells both services (haircuts, colouring) and products (shampoos, conditioners, brushes, styling products).

Knowing your cost of goods sold can help you understand your profit, as well as the efficiencies – or maybe lack thereof – in your business model.

How to calculate cost of goods sold

The cost of goods sold estimate includes raw materials, labour used in production processes, supplies, and products purchased for resale. Most small businesses use the following formula to calculate their COGS expense:

Value of goods inventory at the beginning of the period

Value of any goods purchased for resale during the period

–

Value of goods inventory at the end of the period

The cost of goods sold during the period

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What are start-up expenses?

Start-up expenses, the one-time expenses you need to incur before you make your first sale, are one type of cost you’ll need to estimate when starting a small business.

What are start-up expenses?

Start-up expenses are made up of one-time capital expenses and monthly operating expenses. One-time capital costs might include purchase of initial inventory, purchase of equipment or furniture, improvements to your physical space, development of a website and deposits and fees.

Your start-up monthly operating expense estimate depends on your guess of how long you’ll be “operating” your business without any money coming in the door — we call that “Months to First Sale.” Imagine the T-minus 60 seconds countdown in a space shuttle launch.

The average number of months it takes to plan and start a small business is six, but it really depends on your industry. You know we love research, so we’ll say it again: the best way to find out how long you’ll have to pay your bills without any customers coming in the door is to ask a member of your industry, or someone who operates a business like the one you’re planning to run.

Start-up costs for a home-based service business are usually much less than those for a manufacturing business since you usually don’t have to worry as much about workspace or buying enough equipment to create a product.

Find the type of start-up costs that work best for your business

How you decide to pay will influence your one-time start-up expenses, because the objective is to estimate the amount of cash you’ll need to get to your grand opening. For example, if you need a $30,000 delivery van, you can buy it outright, which means you’ll need $30,000 in cash.

You can also lease it, which means borrowing money to pay for it, which means a smaller initial sum of cash for the deposit or loan down payment. This lets you pay over time when your cash flow is likely to be stronger. However, you’ll always end up paying more in total because of interest expenses and built-in fees associated with leasing.

Carefully consider your start-up needs, and be honest about how much your start-up costs will be. It’s better to make a mistake on paper than on opening day!

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