Yesterday we have gone thru the concept of COGS, right? Are you still confuse on what expenses should be classified as COGS or other Admin, Selling or Distribution expenses?

If this is still too much to think, asking this question to yourself will help to identify if it is a COGS or other expenses; “Would this expense have been an expense even if no sales were generated?”

Below are some of the importance of understanding COGS;

1. if a company’s Gross Profit Margin goes from 80% one period to 30% the next (may due to inconsistencies of COGS classification or it could also an indication that there are inefficiencies in production or that they have issues in the sales process). While the Gross Profit Margin formula won’t indicate exactly where issues are, it can show red flags that will require more strategic analysis. This is something the IRB can and will audit to ensure your reported business income is not artificially low, especially in the construction industry.
2. To determing your selling price, whether it should be cost-plus (Markup) or based on Margin basis & how this pricing strategy will affect your strategic business priorities or expansion plan.

Entrepreneurs, do you know whether the pricing you set for your product/services is using which approach? Do you know the difference between Markup & Margin price setting (or is there no difference at all)? Not knowing this will also be a pitfall for entrepreneurs as setting a wrong price point will make you loose money every time you make a sales?

Stay tune to learn the difference between a markup & a margin.