xThe COGS formula (Cost of Goods Sold) is a financial metric that calculates the direct costs of producing goods sold by a company. It includes the cost of raw materials, labor, and manufacturing but excludes indirect expenses such as marketing and distribution. The standard formula for COGS is: COGS = Beginning Inventory + Purchases − Ending Inventory
Why is the COGS formula important for startups?
COGS helps startups determine their gross profit margin, ensuring they set the right price for their products while maintaining profitability. It also helps in managing inventory costs and securing funding by demonstrating a clear understanding of financials.
What expenses are included in COGS?
COGS includes direct costs such as raw materials, labor, and manufacturing expenses. It does not include indirect costs like office rent, marketing, or administrative expenses.
How does COGS affect a startup’s valuation?
A lower COGS relative to revenue means a higher gross profit margin, making the startup more attractive to investors. If COGS is too high, it can signal inefficiencies in production or pricing issues.
How can startups reduce their COGS?
Startups can lower COGS by negotiating better supplier deals, reducing waste, improving manufacturing efficiency, and optimizing inventory management to prevent overstocking or stock shortages.
Or want to know more about pre-seed funding?
