This is an updated version of a previous post on calculating COGS. For the original post, click here.
COGS is a point of contention for a lot of our clients and something we get a lot of questions about. In this updated post, Tyler explains how to calculate COGS from your e-commerce P&L.
Setting Up Your P&L
The first step to getting a handle on your COGS is making sure your profit and loss statement is set up correctly.
The first category in your P&L should encompass all of your sales channels and conclude with your net profit for the month. Immediately following will be your Cost of Goods Sold category, which includes your landed COGS (which you’ll learn to calculate below) and expenses like Amazon FBA fees and commissions.
Landed COGS are an important calculation that, when broken down, can help you understand how to price your items as well as figure out how much it costs you to acquire your products before they hit your sales channel. In accrual accounting (which you should be using!), you’ll expense your products in the month you sell them, not the month you purchase them.
The calculations for landed COGS are more simple than you think! The equations below will correspond with the examples in the video at the beginning of this post, so if you’d like to see the numbers in action, feel free to follow along there. Here’s how it all breaks down:
Start by listing all of your SKUs next to their basic unit price. Multiply the number of units you’ve purchased by the price you paid for each unit to get the factory price for each unit.
Load the rest of your costs by calculating the other expenses of shipping and acquiring your product from the factory, such as duties, tariffs, and freight costs. You can do this one of two ways.
In order to calculate your total landed COGS, add your loaded Unit Costs to your total Factory Price.
Understanding the total COGS for each SKU allows you to understand how to price your products, control your profitability, and kill the products that aren’t serving your business.
We’ve written before about the e-commerce cash cycle and why it complicates your business’s accounting. In order to understand a little more about what that cycle looks like, you can think of your COGS as the starting point for how inventory moves through your business.
Your total landed COGS for all products becomes a line item on your P&L that, together with your Amazon FBA fees and any commissions you pay to your sales channels, encompasses your total COGS category.
When you first pay for your products, your inventory becomes an asset, and it gets expensed into this category when it’s sold. This accrual accounting process keeps your cash flow projection more accurate and allows you to make smarter CFO decisions about your business. You (or your accountant) will usually reconcile these sales and purchases once a month.