If you are a small business owner who doesn’t manufacture your own products, your cost of goods sold typically would not factor in your indirect overhead costs (or operating expenses) incurred to run your business.įor example, when you purchase inventory from other vendors for resale, your indirect costs might include the monthly cost to rent your storefront or to keep the lights on. Indirect costs like employee wages to make the donuts, utility bills for things like water (if it’s in the recipe), or rent paid for a manufacturing facility.Any tools you need to operate while making a donut - from pots and pans to fryers and stand mixers.The direct inventory cost of manufacturing the donuts, including the regular purchase of baking soda, flour, sugar, and yeast.If you own a donut franchise, for example, you’d include the following in your COGS calculation: But there are other purchased items and indirect costs (like overhead costs) that can be included in your COGS calculations, which we’ll get into shortly. Your direct costs are most often the inventory purchased to make or sell products to customers. Your cost of goods sold includes the direct costs associated with the production of the products your small business sells. In this post, we’ll explain what the cost of goods sold is, how to calculate it, and how to report it during tax season. Almost 20% say they went under due to pricing or cost issues.Ĭalculating and understanding your cost of goods sold (COGS) will help you to better understand your small business cash flow, and set you up for long-term success. Lending Tree reports that almost 30% of small businesses blame “running out of cash” as a major contributor to their startup failure. Unfortunately, many entrepreneurs struggle to do so effectively. Managing cash flow is critical to the ongoing health of your small business. Planning for long-term growth with COGS.What do I need to know about COGS and taxes?. Why small businesses should care about COGS.Why service-based small businesses don’t use COGS.This article was originally published on Feb. Always consult an attorney or tax professional regarding your specific legal or tax situation. This content should not be construed as legal or tax advice.
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