Speaker: How do I understand Cost of Sales or COGS on the P&L statement?
Fred Glave: COGS stands for cost of good sold and it simply is the estimate of the cost of the product that you are going to sell and it is made up by including the cost of the material and the cost of the salaries of the people that are going to build the product or otherwise provide the service if you are in a service based business.
In our example that we generated before, the category one product, we had sales of $36.00 and in fact we use an example here that the COGS for that category is $20.00. If you subtract one from the other, you get a profit for that particular category and product of $16.00 in the month of June.
Now, control of COGS is an extremely important for profitability. So you want to examine each element in detail—how much labor does it take? What is the cost of the material? How much are you going to pay for shipping, packaging, maybe even sales commissions? You also want to be conservative in this area, because if you under price your cost of your good sold then if you underestimate the cost of your gold sold then you may under price that particular item in the marketplace and then you are not going to make very much money if any on that particular item.
So you want to do that again for each category of product and for each month of the year. When you are all done, you take the actual sum of your COGS, your cost of good sold in each month and subtract it from your revenue and you have the profitability of your business in that month. So for in our example that we showed to you in the first month, the profitability is $44.00, second month it's $81.00 and in the third month it's a $131.00
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