Efficient inventory management and regular financial reporting are essential to ensure the ongoing success of an eCommerce store or business.

Good inventory planning encompasses many things, but thankfully, tools like Fabrikatör make managing stock and working out expenditure and gross profit a breeze. From the app's easy-to-use interface, you can generate a wide range of reports that give you valuable information on your costs and profits. One of the most insightful financial reports is the COGS analysis, or Cost of Goods Sold Report, as it breaks down your operational costs and calculates gross profit in seconds.

What is a Cost of Goods Sold (COGS) Report?

Businesses use a Cost of Goods Sold (COGS) report to determine the cost of manufacturing, producing, or acquiring the items they sell. In terms of financial reporting, a COGS analysis is one of the most important reports, as it helps calculate gross profit and gives a clear understanding of your store’s running costs and profit margins. The COGS formula includes beginning inventory, purchases, and ending inventory.

Three main costs are analyzed in a COGS analysis:

1. Cost of the raw materials used to make the items (direct costs)
2. Cost of the labor used to produce the products
3. Cost of the overheads, i.e. utilities, storage, shipping, etc.

Once these costs are established, you can calculate profit by subtracting the COGS from your total revenue using the following equation:  Total Revenue – COGS = Gross Profit. This process helps you calculate COGS accurately and determine your gross profit.

Why is a COGS Report Important for Your E-commerce Business?

Most businesses use a COGS report to become successful, as inventory management data illuminates a store’s financial health and helps identify issues. Accurately calculating business expenses, including COGS, is crucial for managing taxes and understanding financial health.

Benefits of using COGS financial reporting include:

• Gross Profit Insights: The COGS directly affects your store’s profitability and a company's gross profit. Once you know your gross profit margin, you can flag high costs and imbalances and address pricing issues.
• Inventory Optimization: Stockpiling underperforming products is a drain of resources. Analyze the COGS data to understand your inventory and avoid over-stocking issues.
• Pricing Strategy: Use the COGS report to check gross profit margins and set product price points so you make a decent return.

Common Challenges in Generating Accurate COGS Reports and Direct Costs

To ensure COGS reports are accurate, you need to keep accurate records!

Although clever inventory planning applications like Fabrikatör simplify the process of creating inventory management reports, keeping sales and stock data in check is imperative for an accurate COGS report. COGS includes all direct costs incurred in the process of producing goods or services, such as labor and materials, while excluding costs associated with unsold products. This highlights the importance of understanding which costs are directly tied to the production of sold items versus those that are not.

Human error or inputting the wrong information will lead to miscalculations, fluctuating prices of produce and changing shipping costs can lead to projection miscalculations, and inaccurate inventory data will lead to inaccurate COGS reporting.

• Cost of the labor used to produce the products: Labor costs, particularly those directly associated with production, are critical components of COGS.

How to Streamline Your COGS Analysis

To conduct an accurate COGS analysis, here are a few of the best inventory management practices to put in place:

• Run Regular Inventory Audits: For best inventory planning and to ensure minimal errors, run inventory audits regularly.
• Use First-In, First-Out (FIFO) or Last-In, First-Out (LIFO) Methods: Based on your costing and product flow, use a FIFO or LIFO inventory valuation method.
• Incorporate Real-Time Inventory Management Tools: To streamline calculations, save time, and minimize manual errors, automate processes using inventory planning tools like Fabrikatör. This innovative app automates COGS reporting, including both direct and indirect costs, and helps to eliminate guesswork, giving you up-to-date insights for better inventory management and decision-making.

Using a standard formula to calculate cost, which includes beginning inventory, purchases, and ending inventory, is crucial for accurate COGS analysis.

Key Metrics to Monitor in a COGS Report for Gross Profit

In terms of COGS financial reporting data, pay attention to these key metrics:

• The COGS-to-Revenue Ratio: This metric will help you gauge profitability and ensure your store’s running costs and expenses are covered. Tracking both fixed costs and variable costs is crucial to accurately determine product pricing and profit margins.
• The Inventory Turnover Ratio. This ratio and inventory planning data helps you monitor how your stock streams through the business, including variable costs related to production expenses.
• Your Cost Variance: You can use this data to identify changes in production prices and put corrective action in place.

Take Charge of Your Inventory Reports with Fabrikatör

Fabrikatör simplifies many aspects of inventory planning and reporting and eliminates the guesswork, ensuring you always have accurate data to hand.

There are two ways to track COGS with Fabrikatör:

• Fabrikatör’s value in stock report and forecasted COGS. They are calculated with last unit price and product quantity.
• Integration with QuickBooks, Xero or ShipHero: Fabrikatör syncs purchase orders with ERP tools, allowing for financial calculations.

Learn more and gain a competitive edge and start turning reporting insights into profits today by booking a demo with Fabrikatör now!

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