The COGS formula is an accounting term, but it’s not just important during tax time. Understanding your COGS can also give business owners and managers in the hospitality industry important clues as to which goods are profitable – and which aren’t.
Keep reading to discover what the cost of goods sold actually is – and learn exactly how to calculate COGS for your business in a matter of minutes.
What are COGS?
The cost of goods sold, or COGS, refers to the overall cost of creating, acquiring or producing a product. In most cases, this includes the cost of producing the product, packing it, transporting it, and the direct costs of any labour used to prepare it for sale.
Costs of goods sold can include things like:
- Raw materials
- Products bought for reselling
- Transportation costs
- Direct labour costs
- Storage costs
Other general expenses or sales, marketing, and administrative expenses related to your business are not included in the COGS calculation.
Why is the COGS formula so important?
Understanding the cost of goods sold is important because it is directly linked to profitability. If your cost of goods sold is too high, and your price point is too low, you may not be making a strong profit.
Learning the COGS formula is a critical component in maximising the efficiency and profitability of your food service venue. It can show you which goods to prioritise and which to discontinue. If your raw materials or transportation costs increase, for example, you may need to increase the price of your products.
How to calculate COGS
So, how can you calculate the cost of goods sold? The basic COGS formula is simple.
(Beginning Inventory + Purchases) – Ending Inventory = COGS
To calculate your COGS for the year, simply follow the formula. Start by working out your beginning inventory. If your business is new, you won’t have any beginning inventory. However, if you have an existing business that already owns inventory, you’ll need to include the costs of this in your calculations. If you’re calculating your COGS for the year, this will be the cost of any stock from previous years.
Next, add the purchases and other costs you’ve accumulated throughout the year. This includes the raw materials used to reduce the product as well as transportation costs, direct labour costs, storage costs and anything else required to produce the product and prepare it for sale.
Finally, at the end of the year, count up the inventory that you have left. Calculate the cost of this inventory. Subtract the cost from the sum of your starting inventory and purchases, and you’ll have the cost of goods sold.
>> See how Niyoka Bundle from Pawa Cafe keeps track of the cost of her supplies
Cost of goods sold examples
As an example, let’s say a popular Sydney Italian restaurant wants to calculate its COGS for Quarter 1 of the year.
They need to record the inventory from 1st January to 31st March. They start with a beginning inventory of $25,000 from the previous quarter. Their purchases from 1st January to 31st March added up to $8,000. Then, at the end of March, they were left with $6,000 of inventory.
If we use the COGs formula, then we can easily calculate the cost of goods sold for the restaurant for that quarter.
(Beginning Inventory + Purchases) – Ending Inventory = COGS
$25,000 + $8,000 - $6,000 = $27,000
Once calculated, they can compare their COGS to their revenue and learn more about their profitability. Understanding their COGS means that businesses can quickly assess and pinpoint how to increase profits in the next quarter. They can learn which operational costs can be reduced and discover which products are the most profitable.
What percentage of your revenue should your COGS be?
Your COGS percentage is simply your COGS as a percentage of your overall revenue. A healthy COGS percentage for restaurants should be around 27%, but this can vary drastically depending on the type of business you run, the amount of profits your business brings in, and a range of other factors.
So, for example, if the COGS for the Italian restaurant in one week was $1,000 and $4,000 of meals were sold that week, the COGS percentage for the restaurant would be 25%.
How Ordermentum can help lower your COGS
Easy last-minute ordering
When food service venues run out of stock, many are forced to source last-minute supplies from expensive retailers. This increases the cost of their materials and reduces profitability.
On the other hand, ordering too much stock (especially fresh foods) can mean increased warehousing and storage costs, and can lead to spoiled good.
Ordermentum offers food service venues a convenient option for supplies, so they can source high-quality food and packaging supplies easily, at affordable rates.
Improve your accounting by integrating with Xero
Ordermentum also offers transparency around the pricing of supplies, and venues can access business insights. This means that venues can track the cost of supplies more easily and plan for the upcoming weeks and months accurately.
One of the most efficient ways to keep track of your spend in Ordermentum is by taking advantage of our integration with Xero. This lets you automate your bookkeeping with bullseye accuracy - meaning you can be confident that the numbers in your COGS are correct.
I see my average spend, and it helps me keep track of where I’ve spent too much. It’s great for sales data and it breaks it down in to each supplier so you can see your spend clearly. - Niyoka Bundle, Pawa Cafe
If you’re a venue curious about Ordermentum, our venue team would love to hear from you.
Or you can download the Ordermentum app today!
