Miscategorize a few costs and your P&L will tell you that you're profitable when you're not. This video sorts what belongs in COGS, meaning product cost, raw materials, manufacturing labor, inbound shipping, and import duties, from what does not, meaning ad spend, shipping to customers, and refunds. You also get the answer on packaging, which usually counts, and a benchmark to measure against: COGS at 20% to 40% of revenue.
Inventory & COGS
Cost of Goods Sold: What IS and is NOT Included for Ecommerce Sellers
5 min
Transcript
0:00 What COGS is
Hey there, ecommerce sellers. If you've ever stared at your financial statements wondering what's driving your profit margins, then this video is for you. Today we're diving into cost of goods sold, or COGS. We're going to figure out what's included, what's not included, and why that matters to you. So let's dive in.
Okay, first things first, what is COGS? COGS stands for Cost of Goods Sold, and it's basically the direct cost for producing the products that you sell. This includes everything from buying to manufacturing your products and getting them ready to sell. Understanding your COGS is crucial because it directly impacts your profit margins and your overall profitability.
0:35 What is included in COGS
So you might be asking yourself, what's included in COGS? Well, let's make a list of those items so that you know how to calculate COGS for your ecommerce business.
First is your cost of products. This is what you pay your manufacturer for the product that you sell. Next is raw materials. If you're a manufacturer, be sure and include everything that goes into producing your product. This could include fabric, ingredients, and raw goods, all that go into producing that product.
Labor costs. If you're a manufacturer and your employees are assembling the products that you sell, their labor cost could be attributed to cost of goods sold.
Shipping fees to you. The cost of getting your product from your manufacturer to your warehouse is included in cost of goods sold.
Import duties and taxes. If your suppliers are not located in the United States, then import duties and taxes are the cost to your business for importing those products.
1:25 What is not included in COGS
Okay, so if all of those things are included in COGS, what is not included in COGS? This is an area that tends to trip up ecommerce sellers.
Marketing and advertising costs. I'm sorry to tell you, but your Facebook ads do not get to be attributed to cost of goods sold.
Shipping to customers. I'll get more into this in just a minute, but just know that shipping the product from your warehouse to your customer is not included in cost of goods sold.
Returns and refunds. Sorry sellers, but your cost associated with all of those pesky refunds cannot be attributed to cost of goods sold.
1:57 Shipping to customers and packaging
A common question I often get is, can I include shipping to my customers in cost of goods sold? The short answer is shipping your product to you and your warehouse is included in cost of goods sold, but shipping the product from your warehouse to your customer is not a cost of goods sold line item. It should be included in cost of sales.
Another question I often hear is, can I include my packaging in cost of goods sold? Generally, basic packaging to get your product from your shelf in your warehouse packaged and ready to go and shipped to your customer can be included in cost of goods sold. But this is a gray area.
2:36 Why accuracy matters
So you might be wondering, why do I really need to be that accurate with my COGS calculations? Well, I'm going to tell you, it's not just a nice to have. It's a must have, and here's why. Because if you're not capturing the right COGS, your profit margins have the potential to be totally off. You might think you're profitable when in actuality you're losing money. On top of that, accurate COGS is going to be crucial for pricing decisions, determining profitability, and even calculating taxes. Lastly, an accurate COGS number is going to be critical if you ever decide to go through the due diligence process and exit.
3:09 How much you should spend on COGS
Okay, so how much should you be spending on COGS? This can vary by industry, but a good benchmark for an ecommerce business is to have your COGS number be ideally 20 to 40% of your revenue. In some extreme cases, it could go as high as 60%, but you do have the potential of struggling in this case.
If your cost of goods sold as a percentage of revenue is higher, you'll want to be very cautious with your spending. If your cost of goods sold as a percentage of revenue is lower, it gives you more freedom to be more aggressive in your ad spend and marketing, et cetera.
3:42 Recap
Okay, let's do a quick recap. COGS includes all of your direct costs to make or buy your product, including labor, materials, and shipping the product to your warehouse. What's not included? Marketing and shipping it to your customer. Being accurate with COGS is crucial. It affects your profit margins, your profitability, and your overall business decisions. Aim for COGS to be around 20 to 40% of your revenue.
Understanding and managing your COGS helps you stay on top of your numbers and ultimately your profitability. Keep fine tuning and you'll see the impact on your bottom line. So that's your basic guide to COGS for ecommerce. If you need help with your ecommerce COGS or accounting, reach out to LedgerGurus in the description below. If you found this video helpful, don't forget to like, subscribe, and click that notification bell to be notified each time we drop a new video. Catch you next time around.