13 min read · April 09, 2024
Understanding Shopify Cost of Goods Sold (COGS) for Dummies
By Michael Schwartz
13 min read · April 09, 2024
By Michael Schwartz
If you run an eCommerce business on Shopify, understanding the Cost of Goods Sold or COGS is crucial in determining your store's profitability. Calculating COGS accurately allows you to make informed decisions about your inventory, pricing, and marketing strategies. In this article, we will dive deeper into what COGS is, how to calculate it on Shopify, and how it can affect your eCommerce business.
Cost of Goods Sold or COGS is the total cost incurred in producing and selling a product. This includes the cost of materials, labor, and any other direct costs involved in the production process. In Shopify, COGS plays a vital role in determining the gross profit margin of your online store.
COGS is important on Shopify because it helps you understand the true cost of selling a product. By analyzing your COGS, you can determine the profitability of individual products, assess your pricing strategy, and even make decisions on expanding or discontinuing certain product lines.
Furthermore, tracking COGS on Shopify allows you to monitor the performance of your online store accurately. By keeping a close watch on your COGS, you can identify patterns and trends, and take corrective actions if needed.
Tracking COGS helps in identifying the cost of each unit sold, allowing you to adjust your pricing strategy accordingly. This, in turn, can help your online store become more competitive in the market, attracting more customers and increasing sales.
Additionally, accurate COGS calculation gives you insights into your inventory management. You can use this information to identify items that take up too much shelf space or are not selling well and adjust your inventory accordingly.
Constant monitoring of your COGS can also help streamline your production processes, find ways to reduce expenses, and ultimately improve your Shopify store's profitability.
Calculating COGS on Shopify is not as simple as subtracting the cost of each item sold from its sale price. To accurately determine COGS on Shopify, you need to consider several variables. Read more here to know more.
The formula to calculate COGS on Shopify is:
Beginning Inventory + Additional Inventory Purchased – Ending Inventory = Cost of Goods Sold
This formula takes into account the value of the inventory at the beginning of the period, any inventory purchased during the period, and the value of the inventory at the end of the period to calculate COGS. You can also watch this video to learn more about it.
To calculate COGS on Shopify, you need to know the total cost of the product, including all direct costs and expenses that went into its production, such as raw materials, labor, and overhead costs. This calculation should also include the cost of shipping and any other expenses related to the transportation of the product to the customer.
You also need to keep track of your inventory levels, including the beginning inventory and ending inventory for the accounting period. This will help you calculate the total cost of goods sold during that period.
Shopify has built-in accounting features that allow you to track and calculate COGS accurately. You can access this feature by going to the 'Finance' section on your Shopify account dashboard, selecting 'Profit and Loss,' and then selecting 'Cost of Goods Sold'.
This feature allows you to set the cost of each product in your store, update inventory levels, and even export data to your accounting software for further analysis.
The gross profit of your Shopify store is calculated by subtracting the COGS from the total sales revenue. Therefore, an increase in COGS directly affects your gross profit margin.
For example, if you sell a product for $100 with a COGS of $70, your gross profit would be $30. However, if the COGS increases by $10, your gross profit margin on that product would decrease by $10.
(Image by our-team on Freepik)
COGS is an essential part of the income statement, representing the total cost of the product sold during a specific period. A higher COGS means that there is less net income, which affects the overall profitability of your Shopify store.
Furthermore, higher COGS can impact your net sales, affecting the pricing of your products. To maintain a competitive edge in the market, you need to analyze your COGS regularly to adjust your prices accordingly.
Managing your COGS expense is critical to ensuring that your Shopify business remains profitable in the long run. Overhead costs, such as shipping, marketing, and other expenses, can all impact your COGS and, ultimately, your profitability.
By keeping your direct expenses, such as raw materials and labor costs, low and optimizing your inventory levels, you can effectively reduce your COGS expense, leading to increased profitability for your Shopify business.
One of the best ways to improve COGS on Shopify is to optimize your inventory levels. This means adjusting your inventory to match customer demand accurately, which reduces the amount of dead stock and waste produced.
You can also find ways to reduce production expenses by finding more affordable suppliers or improving your production processes to reduce waste and streamline production.
The inventory levels can impact COGS on Shopify in several ways. For example, overstocking your inventory can result in increased storage and logistics expenses, resulting in higher COGS.
On the other hand, carrying too little inventory can also increase COGS. A higher demand can result in a shortage of supply, which can lead to increased production costs, resulting in increased COGS.
(Image by rawpixel.com on Freepik)
Shopify provides a range of powerful analytics tools available to help you track your COGS and gross profit margin effectively. You can access these features by going to your Shopify account dashboard and selecting the 'Analytics' section.
Here, you can view granular data on your sales, inventory, and customer behavior, giving you insights into your store's profitability. Additionally, you can use these analytics tools to forecast demand accurately, adjust your marketing strategies, and optimize your pricing to remain competitive in the market.
If you're new to Shopify, you can start a free trial today to test your COGS calculations. To do this, simply go to the Shopify website, create an account, and start setting up your store. You can then start entering your inventory costs and sales to see how your COGS affects your profitability.
Using Shopify's accounting software to track COGS offers several benefits. Firstly, it provides you with a streamlined and automated way to manage your COGS expense, saving you valuable time and resources.
You can also access a range of analytics tools like Google Analytics to view your store's financial performance and identify opportunities for growth. This includes tracking customer behavior, monitoring inventory levels, and assessing the performance of individual products.
(Image by freepik)
Accurate COGS calculation can help you make informed business decisions for your Shopify store. By providing you with insights into your store's financial performance, you can make decisions on pricing, inventory management, and marketing strategies that can directly impact your profitability.
Furthermore, accurate COGS calculation provides you with a solid foundation for forecasting future demand, making it easier to manage your inventory levels and production processes.
Understanding the Cost of Goods Sold (COGS) and accurately calculating it on Shopify is crucial for running a profitable e-commerce business. By keeping a close watch on your COGS, optimizing your inventory levels, and analyzing your sales data, you can effectively manage your expenses and increase your profitability.
Michael Schwartz
Michael is the CEO and co-founder of taxomate, one of the leading ecommerce accounting integration software solutions.
