The 4 Challenges With Cost Of Goods Sold (COGS)
Ecommerce entrepreneurs need to know if their business is profitable on a monthly basis. Without accurate COGS and inventory values each month, eCommerce/inventory-based businesses are left with inaccurate financials, resulting in big expenses and unideal business decisions.
1. Trusted source of information
It’s critical to have a trusted source of costs as well as month-end inventory counts. Unfortunately, we come across several sellers without trusted costs of both prices and COGS calculations. You can’t go without this information, though. Otherwise, the financials will not be accurate.
We do see sellers using Shopify for inventory quantities, but those quantities aren’t validated, like what a cloud inventory or 3PL report will provide.
2. Not using landed costs
Landed costs = Buy cost + Inbound shipping + Insurance.
As a seller, you need to be building landed costs and posting the full value of inventory purchase expenses on a balance sheet.
If you don’t use landed costs as a seller, you are expensing shipping costs in real-time, even if their products will sell over time.
3. Trusting but not verifying numbers
We’ve seen far too many sellers face COGS issues in these three scenarios:
- Trusting third-party logistics (3PL) without a cloud inventory to watch the quantities will get you into trouble. We’ve seen 3PL’s “lose” inventory because without a report, you can’t make a claim or request that they can find the missing inventory.
- Trusting but not verifying the cloud inventory totals to reality from a month-end cycle count/stocktake update. Cycle counts and stocktakes are different ways to count some or all of the inventory to validate that the physical reality lines up with the numbers in cloud inventory/spreadsheets.
- Not having your 3PL or own warehouse do month-end cycle counts.
4. Miscellaneous
Other COGS challenges for sellers include:
- Tracking or posting returns and lost, stolen, damaged, or donated inventory. Failure to track inventory changes will throw your financials off.
- For manufacturing, tracking wastage and writing it off. In other words, tracking raw materials separately from finished goods.
- Having documented the process for inventory tracking. Sellers need consistency in completing all of the daily, weekly, and monthly tasks (specifically their month-end close process).
- Updating costs on a regular basis and updating their sale price and COGS. Keeping updated, accurate costs will make sure that sellers are pricing their products properly (for a profit). In addition, having accurate current values for each SKU will help in calculating the value of the inventory and COGS.
Interesting in learning more? Check out the eCommerce Fuel podcast: Why You’re Likely Calculating COGS Wrong.
Reach out to us if you’re interested in outsourcing your bookkeeping and accounting to experts in eCommerce businesses. We’re ready to help you better understand how to manage your inventory-based business.
And if you’re looking to optimize, replace, or implement a cloud inventory solution, we recommend contacting our partners at Clearinity.
Still, deciding whether full-time vs. fractional accounting support is right for you can be challenging, especially when your business is constantly changing.
That’s why we offer a free consultation for business owners exploring fractional accounting services! Our team will take time to understand your unique business and its financial goals to see if we’re the right fit for you. And if we’re not the right fit? We’ll help steer you toward professionals who can help.