How to Calculate WooCommerce COGS to Analyze Sales, Inventory & Gross Margins
Rebekah Braceon September 16, 2022.
As a WooCommerce store owner, there are a number of metrics you’ll need to track to ensure your business is successful. Learning to calculate Cost of Goods Sold (COGS) means you can understand how much you’re actually spending on doing business. You'll also be able to determine which products in your portfolio are the most or least profitable, so you can take steps to optimize your bottom line.
Here’s what you need to know about calculating and using COGS.
How to Calculate WooCommerce COGS
1. Identify Direct and Indirect Costs
The costs involved in running a business can be both “direct” and “indirect”. Direct costs are those specifically associated with selling the product, such as the materials involved in making an item and the shipping fees. Indirect costs include overheads like sales and marketing strategies designed to bring people to your store.
When calculating COGS, most companies will exclude indirect costs, as these are often associated with customer acquisition cost.
2. Determine the Beginning Inventory
“Beginning inventory” for the year refers to the inventory left over from the previous period. You’ll need to calculate a total dollar value for all of the items you have in stock during the current accounting period, before adding on additional purchases.
3. Add Up Inventory Purchases
The next step is adding up any inventory purchases which you may have made throughout the period of the calculation. For instance, you may have bought additional packaging utensils or more raw materials for high-selling products. Remember to consider the cost of shipping and manufacturing for each product as well.
4. Determine the Ending Inventory
“Ending inventory” refers to the remaining sellable inventory at the end of a sales period. For instance, if you started the period with 200 products, and added another 100, then sold 200 of your products, your ending inventory would be 100 products. You would then calculate the dollar value of these products.
5. Plug the Values into the Equation
With all of your values in place, you can calculate your WooCommerce COGS. The formula is as follows:
COGS = Beginning Inventory + Purchases – Ending Inventory
For instance, in a situation where you had a beginning inventory of 200 products equaling a value of $2,000, spent $500 on shipping and manufacturing throughout the period, and were left over with 50 products equaling a value of $1,500, your formula would look like this:
($2,000 + $500) – $1,500 = $1,000
Value of COGS Calculation for Your WooCommerce Store
COGS is an important metric on any company’s financial statement, as you’ll subtract it from your revenue to determine your “gross profit”. COGS also helps you to determine whether you’re using your budget effectively.
The benefits of COGS calculations for your WooCommerce store include:
Indicates Efficiency of Resource Management
If you discover your COGS is higher at the end of a period than the amount you spent on labor and supplies, this is a sign you’re not using your existing inventory efficiently. You may find you can cut down on the supplies you use at a later stage to increase your profits.
Serves Legislative and Tax Purposes
COGS can be included when calculating the taxes for a given period. COGS is a business expense, which means it can be used to offset the amount of revenue you create during the tax season. Knowing how much you spent on goods reduces your tax burden.
Supports Product Pricing
COGS can help you determine when to make adjustments to your products' selling price. By analyzing your profit margin, you can see whether your COGS and selling price are in relation. For example, if any of your direct costs have increased, making it more expensive to manufacture your products, you can adjust your selling price in accordance with this to ensure you maintain a healthy profit margin.
Streamlines Future Planning
By analyzing your COGS, you can more easily identify shortcomings in your current strategy and opportunities for increased sales. For example, it can highlight which of your products are the most popular and which aren't performing as well as they should. You can adjust future strategies accordingly to capitalize on popular products and either discontinue unpopular products or utilize one-click upselling methods to boost sales.
Calculating COGS for Shopify, WooCommerce, or any other store is an important strategy to ensure your business is profitable, because it gives you in-depth insights into your store's sales, inventory, and gross margins. You can use the same strategies mentioned above to calculate and improve COGS for Amazon stores and marketplaces too.