Acronym Academy: COGS

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Eric Berkhinfand

Today we are going to talk about COGS.

And no, not these types of cogs, if you were thinking that:

We are talking about the business type of COGS — one which can better help you understand the profits you are earning from the products you sell. Let’s jump in!

Acronym Overview

Acronym: COGS

Stands for: Cost of Goods Sold

Complexity: Easy

Topline

When evaluating the performance of your business there are a number of different figures that you need to look at.

The first place you should start is at your revenue. Revenue is the lifeblood of any business — if there is no revenue, there is no business. And while it is important, it only tells part of the picture, and can often be misleading.

Let’s look at a simple example. Business X and Business Y manufacture and sell water bottles.

In their first year of operation, both businesses sell 5000 bottles at $20 per bottle — giving them each a total revenue of $100,000 each.

On first thought, you might think that both companies have performed exactly the same for the period. However, we are missing a huge piece of the puzzle — those waterbottles cost money to produce. And it’s that cost which is their COGS (cost of goods sold).

So let’s dig deeper, it costs Business X $5 to produce a bottle as they manufacture overseas, and it costs business Y $10 as they manufacture domestically.

So, therefore, the COGS for each business is:

  • COGS Business X = 5 x 5,000 = $25,000
  • COGS Business Y = 10 x 5,000 = $50,000

Ultimately giving each business a gross profit of:

  • Gross Business X = 100,000 - 25,000 = $75,000
  • Gross Business Y = 100,000 - 50,000 = $50,000

So we can see that at least at a gross level, Business X has been more successful.

Going deeper

So how you use COGS to help you better operate your WooCommerce store?

By default, WooCommerce only allows you to enter the selling price of your product/service/subscription. This means that when you look at your WooCommerce/Metorik reports, you will only ever be able to determine your revenue. And as we learned above, revenue can be deceiving. 

What this also means is that you won’t be able to determine profit within WooCommerce. You would need to export your WooCommerce revenue to your accounting software and then see your profit in your profit and loss report. That’s not an ideal workflow — as especially if you're only exporting this quarterly or even yearly, there will be a lag in determining how profitable your products actually are.

So how would you go about integrating your COGS into WooCommerce?

Well, WooCommerce has actually built a COGS extension to allow you to enter your cost for each product you sell. This is great as it now allows you to have a cost price and a selling price for your products. The COGS extension costs $79 but it’s well worth it:

Even Deeper

Once you add the COGS extension, you will see a new profit report appear in Metorik:

Since Metorik now has access to your cost per product, it can now also determine your profit!

The profit report has a similar feel to the order and revenue reports, but instead of revenue, it shows you your total profit and COGS for the period you selected. It will also show you a breakdown of profit per hour/day/month (depending on the period you selected):

And if you want to dig deeper, the products report will now also show you cost and profit per item:

This will allow you to evaluate which are your most profitable products on the fly — something which otherwise would not have been easily possible! 

TL;DR

Integrating your COGS directly into your WooCommerce store will allow you to have a much better understanding of the profitability of your products and store. 

And while it’s important to look at your revenue, remember that it only tells a part of the overall picture of your business!

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