What in the World are COGS?

COGS. You mean like on the Jetsons? Whenever I hear the word cogs, I immediately think of George Jetson working at Cogsly Cogs. (I think I'm showing my age).

In business, COGS is actually an acronym for Cost Of Goods Sold. And it's an extremely important term to know. COGS are any expenses DIRECTLY related to producing the products you sell. This means the materials and labor it takes to make the product are considered COGS. The cost of transporting it to your store is also COGS. Basically, any expense that has to occur for you to sell that product.

Marketing to sell your product, wages to the people who sell your product, and expenses to distribute your product are NOT part of a COGS account.

You can find your COGS on your Profit and Loss Statement. It's near the top in the income section. This might sound weird since these are expenses, not revenue. But you find them there because you subtract your COGS from your income to determine your gross profit.

So why do you need to know your Cost Of Goods Sold? One reason is to understand your KPIs, specifically your Gross Profit Margin. Knowing your profit margin will help you determine what to sell your products for. You want to sell them at a price where people will buy them so you make a profit. That's the whole reason for getting into business, right?

It will also help you know if you are getting a good deal from your vendors. If not, you might decide to negotiate a better price. Or to move on to another vendor altogether.

So, when you think about it, COGS is an appropriate acronym. Just like cogs being the fundamentals of a clock working, COGS is the backbone to making a profit.