From Confusion to Clarity: Simplifying Your Ecommerce COGS

Calculating the landed cost of goods sold (COGS) is critical for ecommerce sellers, often leading to confusion and stress. Whether you’re an Amazon seller or an ecommerce brand owner, understanding this aspect of your business is vital for accurate financial management and strategic decision-making.

The Importance of Accurate Landed COGS

1. Accurate Tax Filing: One of the primary reasons to get a handle on your landed COGS is for accurate tax filing. Incorrect inventory and COGS accounting can lead to issues during an audit or result in missed deductions. By ensuring precise calculations, you can confidently file your taxes and avoid potential legal and financial troubles.
2. Business Insights and Strategy: Accurate COGS data enables you to use your financial numbers to drive business decisions. When you understand your true costs, you can better manage cash flow and profitability. For example, comparing two brands with different profit margins highlights how those with lower COGS and higher margins are better positioned for growth and stability.
3. Preparing for a Future Exit: Even if selling your business isn’t on your immediate horizon, solid COGS practices are essential for future exit planning. Potential investors or buyers will scrutinize your financials, and having dependable, accurate inventory and COGS accounting will make this process smoother and potentially increase your business’ valuation.

Calculating Landed COGS: A Practical Guide

1. Understand the Components: Landed COGS includes all costs associated with bringing a product to your warehouse, such as factory costs, duties, ocean freight, tariffs, etc. It is important to ensure these costs are accurately reflected in your inventory asset account.
2. Simplified Approach for Most Sellers: A straightforward method works best for many ecommerce brands, especially those with annual revenues under $50 million. Calculate an average landed cost per unit by dividing the total costs (including freight, duties, etc.) by the number of units. This average cost can then be used to expense the COGS based on the monthly units sold.
3. Regular Inventory Reconciliation: Periodic inventory reconciliation ensures that your balance sheet accurately reflects your inventory. Typically done quarterly, this process involves verifying that the estimated values in your books match your actual inventory. Accurate inventory records are crucial for tax purposes, profitability analysis, and preparing for a potential business exit.

Best Practices and Common Pitfalls

1. Avoiding FIFO Complications: While the first-in-first-out (FIFO) method is theoretically ideal, it can be challenging to implement accurately without advanced inventory management software. A practical approach is to use an average cost method, simplifying the process while maintaining reasonable accuracy.
2. Importance of Detailed Tracking: Consistently track all expenses that contribute to your landed COGS. Whether inbound freight or tariffs, these costs must be included in your inventory asset and expensed proportionally as you sell your products.
3. Seeking Professional Assistance: If the process feels overwhelming, consider seeking professional help. Expert accountants specializing in ecommerce can manage your COGS calculations, ensuring accuracy and saving you time and stress.

Take Control of Your Financial Future

Mastering the calculation of landed COGS is essential for ecommerce success. It helps in accurate tax filing and business strategy and prepares you for a potential future exit. If you’re struggling with COGS calculations, contact our Seller Accountant team. Discover how we can simplify your COGS calculations and enhance your business’ profitability and growth.