Pricing and the cost of goods sold
Setting prices is one of the most important things you’ll do as a new business owner. A lot of factors play into the value you put on your products or services. But none is more important than covering your costs.
The first rule of price setting
Not every sale will make you money. Sometimes you’ll sell stock at discount to get rid of it. Or you may have to redo a job for an unhappy client. But as a general rule, you need to get more money out of a sale than you put in to it. To do that, you need to know the cost of the goods sold (also known as cost of sales).
What is cost of goods sold (or services sold)?
Cost of goods sold, often abbreviated to COGS, tells you what your business spends to deliver products or services to customers. These direct costs are distinct from general operational costs like rent or salaries.
A good way to figure out if something is a COGS is to ask:
If either of these answers is “yes”, then it’s probably a COGS. There are many types of COGS and some are hidden, or hard to estimate. When you think you’ve counted them all, get an accountant or bookkeeper to check your work. They’ll spot things you might have overlooked. And a missed cost can be the difference between profitability and failure.
These formulas give you a basic intro to calculating cost of goods or services. Your business may not face every type of cost identified. In that case, just put $0.