Why Your Cost of Goods Sold is So Very Important | DataDrivenInvestor
Many companies don’t really understand what a cost of goods sold is and don’t calculate it correctly. I’m going to tell you why that’s dangerous.
I get endless writing fodder from my clients. I am currently working with a company that is acquiring another company. My partner and I were retained to calculate a valuation and propose an appropriate deal structure. Easy peasy. Right? Wrong. The target company is a manufacturing company and their cost of goods sold (COGS) was wrong in six ways from Sunday leading to an inaccurate gross profit margin. It is difficult to value a company without a solid COGS and gross profit number. Further, it is difficult to make decisions about your company if you don’t know what your COGS is.
COGS Formula
Let’s start with the formula for COGS: beginning inventory plus purchases minus ending inventory. That’s it and it is logical. It’s what you started with (beginning Inventory) plus what you purchased to add to that (purchases) less what you have left over (ending inventory)…
