In the United Kingdom, there are around 5.9 million small companies. One out of every three companies is experiencing cash flow issues. If you’re not used to it (new), managing your company’s cash flow might be a complicated process. Knowing your cost of sales is essential to track the movement of your cash flow in your company. So, in this blog, you will learn about what is the cost of sales and what to include in the formula of COS.
What is the Cost Of Sales?
Cost of sales refers to the cost of goods sold or how much money a company pays to make a transaction. In general, this term refers to how much it costs a company to create and manufacture a product to market it. These expenses are considered as a required business expense for the overall stability of your company. That’s why you should record it as an expense on your Income Statements. Moreover, the cost of sales is also required to calculate your company’s gross profit and profit margin.
What to Include in Cost of Sales Formula?
In order to calculate the cost of sales, you need to include all your direct and indirect costs (expenses), which are incurred in the manufacturing and selling of the products. Therefore, you will need the following three values to calculate the COS.
- Initial Inventory
- Ending Inventory
Initial Inventory – It’s the value of your existing inventory (items, etc.) At the start of an accounting year.
Purchases – It refers to the items you purchase or create in order to include them in your inventory for the accounting year.
Ending Inventory – It’s the amount of inventory leftover at the end of an accounting period. You can calculate it by calculating the inventory’s physical cost at the end of the year.
Calculation of Cost Of Sales – Example & Formula
At the start of a month, a company has £15,000 inventory available. During the month, it spends £20,000 on different inventory items, and at the end of the month, it has available £7,000 of inventory. So, let’s work out the cost of sales during the month!
Cost of Sales = Initial Inventory + Purchases – Ending Inventory
= £15,000 + £20,000 – £7,000
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We hope now you are well aware of what is the cost of sales and how to work out it. To make data-driven decisions and to keep a record of your business sales, you can calculate your own cost of sales. You must consider initial inventory, purchases, and ending inventory in order to calculate COS. Utilising the example and formula that we have provided in this blog will help you forecast your cash flow, work out your profit margins, and maintain the overall profitability of your business.
You only need to focus on keeping precise records of your company to avoid errors resulting in incorrect gross profit figures. However, it is recommended that you seek professional assistance in this area.
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Disclaimer: This blog contains general information about cost of sales.