Scribd
Upload
177 views4 pages

Cost of Goods Sold and Operating Expenses

Cost of goods sold (COGS) refers to the direct costs associated with the production and sale of goods, while operating expenses are ongoing business costs like rent, salaries and marketing. It is important for businesses to accurately project both COGS and operating expenses when building financial projections, as these costs must be lower than revenues in order for the business to be profitable. Examples of operating expenses include accounting, advertising, insurance, legal fees, rent, salaries and utilities.

Uploaded by

Ana Mae Catubes
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
177 views4 pages

Cost of Goods Sold and Operating Expenses

Cost of goods sold (COGS) refers to the direct costs associated with the production and sale of goods, while operating expenses are ongoing business costs like rent, salaries and marketing. It is important for businesses to accurately project both COGS and operating expenses when building financial projections, as these costs must be lower than revenues in order for the business to be profitable. Examples of operating expenses include accounting, advertising, insurance, legal fees, rent, salaries and utilities.

Uploaded by

Ana Mae Catubes
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

Cost of Goods Sold and Operating Expenses (REPORT)

 Once you have your revenue projections, you next consider costs.

An income statement has two categories of costs


 cost of goods sold
 operating expenses

Cost of goods sold (COGS)

- is the direct costs of the items sold.


- is the total amount your business paid as a cost directly related to the sale of products.
- is the cost of inventory that is sold in that period.

 As with revenue assumptions, you need to sharpen your COGS assumptions.


 Remember that your financials need to mirror the story you related in your business plan—be
consistent

 Cost of goods sold is an important number for business owners and managers to track. That is
the absolute lowest price you can sell a product to break even. Any additional margin goes
back to covering overhead and eventually profit. If you don’t know your COGS and break-even
point, you don’t know if you’re making or losing money.

 Cost of goods sold is a major contributor to margins:


- Your business will never make money if cost of goods sold is higher than your product
pricing. Always track COGS to help ensure you generate an operating profit.

Operating Expenses

 In addition to direct expenses, businesses incur operating expenses.

Operating Expenses

- are the costs of keeping the business running, beyond direct materials and labor.
-  they’re the costs a company generates that don’t relate to the production of a product.
-  are summarized on a company’s income statement. Every company has different operating
expenses based on their industry and setup.

 Operating expenses typically don’t directly impact price or quality. So controlling operating
expenses can improve your bottom line without making your product worse, meaning you can
keep more cash in your business.

 Examples of operating expenses include things like:

 Accounting fees

 Advertising and marketing

 Insurance

 Legal fees

 License fees
 Office Supplies

 Maintenance and repairs

 Rent

 Salaries and wages (other than direct labor for production employees)

 Property taxes

 Travel

 Utilities

 Vehicle expenses

 The build-up method forecasts those expenses on a daily, monthly, or yearly basis as
appropriate. At this point, however, you are just trying to get a sense of the overall business
model and gauge whether this business can be profitable; showing it on a yearly basis is
sufficient.

 The ‘‘devil is in the details,’’ as they say, and one problem area is accurately projecting
operating costs, especially labor costs. Constructing a headcount schedule is an important step
in refining your labor projections.

 Financial analysis is really just the mathematical expression of your overall business strategy.
Everything you write about in your business plan has revenue or cost implications.

Preliminary Income Statement

 Once you have forecasted revenues and expenses, you put them together in an
income statement. You need to annualize that figure.
 Note that the first line is called Total Revenues and then shows the detail that creates
that total revenues line by itemizing the different revenue categories. COGS is handled
in the same manner as revenues; you multiply the typical day by number of days in a
year to get the annual total. After determine operating expenses by most appropriate
time frame, take the operating expenses worksheet and put it into the income
statement. If you believe that you can secure debt financing, put in an interest
expense.
 However, for the initial forecasts, you may not yet know how much debt financing
you’ll need or can secure to launch the business, so leave out the interest expense
until you derive a reasonable estimate. Next compute taxes. Make sure to account for
federal, state, and city taxes as applicable.
 Note that the right column calculates the expense percentage of total revenues.This is
called a common-sized income statement. Although you have been rigorous in
building up your statement, you can further validate it by comparing your common-
sized income statement to the industry standards, which is where you start using the
comparable method.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy