Currently, there are around 5.8 million small businesses in the UK. One out of three businesses is facing troubles with the cash flow. Managing the cash flow of your business can be a daunting task if you are new to it. To measure the movement of the cash flow in your business, knowing the cost of sales is the prerequisite. Therefore, it’s is crucial to figure out the cost of sales. Read on to find out what is cost of sales and how to calculate it.
What is the Cost of Sales?
In simple words, we can say that cost of sales is the cost of goods sold, which means how much money a business spends to make a sale. Generally, this term is linked to the manufacturers as they create and manufacture a product to sell it.
These costs are taken as a necessary business expense for the continuous operation of your business. For this reason, you should consider it as expenditure on your income statements. Along with it, the cost of sales is needed to work out the gross profit and profit margin of your business.
Now that you know what is the cost of sales. Let’s see what to include while calculating the cost of sales.
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What things to include while calculating the Cost of Sales?
Typically the cost of sales includes the payment made for:
- Raw materials for manufacturing the products
- Material for Builders
- Labour involved in manufacturing
You need to know that those supplies that are not directly related to the manufacturing and selling would not be considered Cost of Sales.
How to Calculate Cost of Sales?
To calculate the cost of sales, you need to find out three values to work out the cost of sales.
It is the value of the inventory (products etc) you already possess at the beginning of an accounting year. You need to turn the value of it into pounds to know its worth. It includes:
- Last year inventory (unsold items etc)
- Raw materials for manufacturing
- Supplementary Supplies like packaging, etc
It includes the products you buy or make to include them in your inventory for an accounting year.
It is the inventory that is the leftover value of the stock at the end of an accounting period. You can count it by working out the physical value of the inventory at the end of the year.
Cost of Sales Formula
Now that you know the three components of cost of sales, you can use them to work out COS through this formula:
Cost of Sales = Beginning Inventory + Purchases – Ending Inventory
To work out the accurate value of the cost of sales, you need to add both direct and indirect costs into it.
Quick Sum Up
Now that you know what is the cost of sales and how to calculate it, you can keep track of your business sales and make result-oriented decisions for your business. The cost of sales will provide you with a forecast of your cash flow, profit margins, and the overall profitability of your business.
You just need to remember that you need to manage your business records accurately to avoid mistakes that can lead to the wrong gross profit results. Therefore, it is recommended to take the help of a professional in this regard.
Disclaimer: This blog is intended for general information on the cost of sales.