The account on your income statement called Cost of Goods Sold can be confusing to non-accountants. In this article, we’ll attempt to de-mystify it and explain how it works.
Cost of Goods Sold is an account in your Chart of Accounts that is a very special type of expense. It is the amount of direct costs of items that were sold by the company. It is related to inventory, and it helps to see the flow of transactions to understand the big picture.
When you purchase an inventory item for sale, it’s considered an asset (not an expense yet) in your company. When you sell an inventory item, the asset is reduced and the Cost of Goods Sold account is increased, moving the item from an asset to an expense. It’s no longer an asset once it’s sold, and the cost of the item sold reduces your profit and is expensed into the Cost of Goods Sold account.
Some accountants will abbreviate the Cost of Goods Sold account to COGS, and you might hear them call it that.
In the case of wholesale and retail businesses, the cost of goods sold is the amount that was paid for the inventory items to be sold. In the case of a manufacturer, the costs can include the cost of raw materials, labor to produce the item, and sometimes additional allocations of other related costs. Construction businesses may have a Cost of Construction account or Contract Costs instead of COGS. Service businesses will typically not have a balance in the Cost of Goods Sold account. If they do have direct costs, the costs are often coded to a Supplies account under expenses.
At any point in time, the cost of items you purchase are in two different accounts:
- The unsold items are reflected in the asset account, Inventory, on your Balance Sheet report.
- The sold items are reflected in the Cost of Goods Sold account, on your Income Statement report.
It’s important that the Cost of Goods Sold balance is accurate, because there are many good things you can learn from it when you compare it with inventory. You can learn how fast your inventory is selling, and you can determine your gross profit margin.
If your inventory purchases have not been coded correctly, you can take inventory and arrive at the correct cost of unsold items. If your physical inventory does not match your books, your accountant can make a correcting entry between Cost of Goods Sold and the Inventory account so that both of them are accurate.
If you have further questions about the Cost of Goods Sold account, feel free to reach out any time.
Can you believe that half of 2019 is gone already? That means it’s a great time to take stock of how your business has done for the first half of 2019 so that you can meet your financial goals for the entire year.
On Track for Sales
Are you on track to make your 2019 revenue number? The first step is to check your 2019 budget numbers for total revenue. (Don’t have a budget? – Check with us; we’d be delighted to discuss that service with you.)
Next, get your Income Statement for June 2019 Year-to-Date and check the revenue figure. Are you on track with your budget, or are you halfway there revenue-wise, accounting for seasonality? If so, pat yourself on the back! If not, what promotions will you put in place to boost your growth for the rest of 2019?
On Track for Profit
Looking at the same Income Statement, check your net income figure. Are you on track with what you planned? If so, great! If not, the reason is simple: it will be either lower sales than expected or higher expenses than expected.
If your expenses are too high, you’ll need to drill down into each of your expense accounts, including cost of goods sold, to see which ones are higher than expected. Were there some unanticipated costs? Does your pricing need adjusting? Do you need more volume to cover your costs? This is where we can help you with an analysis of where your opportunities are to increase profit.
On Track for Cash
One more place to look is your cash balance. It can be uncomfortable when you are running short of cash for your business. If your balance is lower than you’d like it to be, it could be because of some of the factors mentioned above. It could also be because you just purchased an asset like a truck. If you need help with improving your cash flow, that’s another thing we can help you with.
This mid-year review can help you head off any small problems before they grow into big ones throughout the rest of the year. And it can keep you on track so you can meet your 2019 business goals.
Having repeat customers is essential to many businesses, and the key to keep clients coming back is to provide them with great customer service. Here are five ideas to rate your business’s savvy when it comes to serving customers well.
- Make a great first impression.
When customers make a purchase from you, make them feel great about it by sending them a series of indoctrination emails. Congratulate them on the purchase, let them know how to get the most out of their new purchase, and encourage them to connect with you on social media and your mailing list.
- Measure response time.
How fast do you answer prospect and customer questions? Social media has changed the game. Customers that reach out via social media platforms, their phones, chat, or messaging apps expect an immediate answer. Facebook even gives a badge to businesses who respond quickly and consistently.
Not only do businesses need to monitor messages coming in from a record number of places – email, phone, web forms, chat, social media, and more – they need to respond faster than ever.
Without measuring your response time, it’s hard to know how you’re doing, so putting measures in place is the first step to improving this customer service metric.
- Publish clear policies.
Good customer service starts with setting clear expectations. Before a customer buys from you, they should be able to know what your return policy is in case something goes wrong. Some of the policies that should clearly be published online as well as at all customer-facing business locations include:
- Returns policy: If the product or service is not as expected, can the customer obtain a refund? Is there a re-stocking fee? What about shipping? Cash back vs. store credit?
- Shipping policy: Most people expect free shipping these days. They will want to know what it costs and how long will it take to get the item.
- Terms of service: Are there any limitations to the product? Or legal items that need to be communicated?
- Encourage feedback.
Your best ideas for new products and services can come from your customers. Ask for feedback by sending customer satisfaction surveys and requests for testimonials and reviews. Read what customers have to say about your service so that you can make improvements as needed.
- Check your ego at the door.
As small business owners, sometimes we need to be humble, especially when things go wrong. Be generous with apologies to customers; it will go a long way toward improving customer relations. If you’re at fault, admit it and make it right with the customer. Even if you’re “right,” find a way to explain to the customer so that they feel good about you and your business.
Delivering great customer service can be a huge competitive advantage for your business. How does your business stack up against these five ideas? Try them, and watch your revenue grow.
Every business has customers, and while all customers are important, most entrepreneurs will agree that some customers are more important than others. This may be due to the amount of revenue the customer brings in, their ability to refer new clients to you, the interesting challenges of the customer, or another factor. It makes sense to identify these clients so you can spend more time with them or at least acknowledge them in some way.
How do you find out which clients have generated the most revenue with you? If you store customer data in your accounting system, you can run a report to generate the data you need. In QuickBooks, the report is called the Income by Customer Summary Report. In Xero, it’s called Income by Contact. If you do not store customer data in your accounting system, you may be able to generate a report from your billing system, shopping cart, or point-of-sale system.
The reports look like this: each row holds the customer name and the Income column holds total revenue by the customer. If your system allows you to sort the revenue field, do this in descending order. If not, you can export the data to Excel and sort it in Excel.
Once you’ve sorted the data, the answer is right in front of you. Your top customers based on revenue will show in order. These are the customers you may want to consider spending more time with. Schedule periodic lunches with them, give them a call on a regular basis, and send them a gift or thank you note once in a while. The report helps you organize your connection points with your top clients so you don’t miss an opportunity or forget to reach out to an important customer.
Run this report on a regular basis so that you’re focused on nurturing the most important relationships in your business. You can also look at trends to see if you’re losing revenue over time or gaining revenue with new clients. You can reach out to clients that are spending less with you to try to save the relationship before it’s too late. And you can get to know new clients that are growing with you so that you can grab even more business.
Make this report a regular activity in your business to stay close to what your customers are doing with you.
Setting customer expectations in your business is essential to gain the trust of your customers, avoid conflicts, and maintain a high level of customer service. One way to set customer expectations is to clearly state policies that are customer-facing. Many of these are accounting policies that we can help you with. The following policies are ones that every business should clearly publish.
When customers purchase your products or service and don’t get what they expect, what is their recourse? Your refund policy should clearly state which products and services are refundable. Do customers need to physically return the product in-store or via shipping? What if it’s a service? Are they refunded in cash or credit card? Or is it a store credit? Is there a deadline for refunds?
All of these questions should clearly be outlined in your refund policy. Your website is a great place to publish it.
If your customer has a complaint, how should they submit it? Is there a hotline to call, a suggestion box, or a form to fill out? If your business and employees are licensed, is there a government agency to write? A notice should be posted on your website and in your physical location describing where to submit complaints.
Not all businesses need a shipping policy, but you do if you ship physical goods to a customer location. What is the cost of shipping? What is the expected delivery time? A shipping policy explains this as well as what can go wrong: If the item was never received, what should one do? Must you sign for a shipment? If you return a shipment, who pays the shipping? If an item is received damaged, how do you file a claim?
While not a policy this customer communication needs to be clearly posted. What forms of payment will you take? If you take a check, what ID does the customer need to show? Do you take some of the newer forms of payment such as Apple Pay or cryptocurrencies? How do gift cards work?
If a customer doesn’t pay their bills on time, they should know what to expect. Will interest be charged? Will the account be sent for collections? Will someone break the customers’ legs? Will future purchases be cancelled or require a C.O.D. (cash on delivery) payment?
You might not think of your accountant when it comes to writing these policies, but you should; we can help. A good accountant can help you craft these customer service policies so that your communications and expectations with customers are better than ever.