Imagine your store bustling with customers. Their carts are overflowing with items, and your checkout lines are constantly in motion as a steady stream of shoppers make their purchases.
After closing up shop, you check your end-of-day reports and discover a new sales record for your store. But even after bringing in so many customers and making so many sales, you’re disappointed to learn that you didn’t turn a healthy profit.
The culprit behind this retail nightmare is a high cost of goods sold (COGS).
Understanding and controlling COGS is crucial for small business success — which is why we’ve put together this quick guide on the average COGS for retail.
Keep reading to learn what COGS is, why it matters, and how to calculate it. Plus, get our top tips for minimizing costs and maximizing profits.
What Is COGS for Retail?
Put simply, COGS is a measure of how much you spend on your stock before a customer purchases it.
Imagine you own a hardware store that offers a wide variety of power tools. While power tools are profitable, they can be expensive to keep in stock.
Along with paying a manufacturer or wholesaler for the tools themselves, you have to budget for shipping and handling costs to have them delivered to your store, taxes and fees if the tools are imported from another country, and extra packaging costs to label them with your store’s branding. You should also include labor costs for employees who stock and straighten your shelves.
These costs are all examples of what goes into your average COGS as a retailer. After a customer purchases a tool, you have to account for how much you spent on it beforehand.
How To Calculate Your Average COGS
Before we dive into why COGS is such a critical retail metric, let’s cover how to calculate your store’s average COGS.
There are three essential elements you need to calculate COGS:
- Beginning inventory: This is the value of inventory you already have on your shelves before your weekly, monthly, or annual restock.
- Purchases during the current period: This is how much you spent on inventory throughout the week, month, or year.
- Ending inventory: This is the value of inventory left over at the end of the weekly, monthly, or yearly accounting period.
After you have these three numbers, it’s time to plug them into this formula:
Beginning Inventory + Purchases made during the current period - Ending inventory = COGS
Let’s take a look at an example. John owns a liquor store and wants to calculate his annual COGS.
Right before the start of a new financial year, John and his team take stock of his liquor store, determining exactly what he has in stock. John calculates the value of his stock, determining that his beginning inventory has a value of $10,000.
Fast forward to the end of the year, and John sorts through his purchase orders and invoices to find that he spent $50,000 on inventory. He then audits his store’s stock again, and notes that he has $5000 worth of inventory still on his shelves.
Here’s what John’s average COGS for retail calculation should look like:
$10,000 + $50,000 - $5000 = $55,000
Now, John knows that his average COGS for the year was $55,000 — and he’s ready to calculate his gross profit to see how his liquor store performed overall.
Why COGS Matters
As a retailer, your number one concern is how much profit you’ve made — and COGS is an essential piece of the gross profit equation.
Let’s look at how average COGS factors into the gross profit formula:
Revenue - COGS = Gross Profit
It’s that simple! Once you know how to calculate your average COGS, you can discover exactly how much you’re making in profit.
Pro Tip: Your store’s point of sale (POS) system should make calculating COGS and gross profit a breeze. You can check your inventory records and sales reports to get a convenient, accurate overview of exactly what you have in stock and how much you’ve made in revenue at any given time.
Our Top 3 Tips for Keeping Your Average COGS Under Control
Since COGS plays such a major role in shaping your bottom line, keeping it under control is critical for your store’s success.
Let’s explore a few best practices that can keep your costs low and profits high.
1. Minimize Waste
If left unchecked, waste and spoilage can cause your average COGS to skyrocket. Every expired product you throw away is money down the drain.
Monitoring waste is particularly important for retailers in the grocery industry, so we recommend these tips for keeping your inventory as fresh as possible:
- Implement a first in, first out (FIFO) policy
- Clearly label your products with their expiration date
- Invest in reliable coolers and freezers to keep your goods at the right temperatures
With these strategies, you can minimize your store’s waste and keep your COGS low.
Shoplifting is another threat to your store’s bottom line.
If your shelves are constantly bare because of thieves rather than paying customers, you’ll have to spend more to keep your store stocked — resulting in high COGS but low gross profits.
To combat theft-related shrinkage, we recommend investing in two key tools. First, you need a POS solution with powerful shrinkage monitoring features and security permissions. This tool will help you spot suspicious trends and take action before theft eats into your bottom line.
Second, we recommend installing a combination of real and decoy security cameras to deter and spot thieves.
These two small changes can go a long way in protecting your store’s inventory from criminals.
3. Optimize Inventory Management
Our final tip is to master the art of inventory management and stock the right products in the right amounts.
If your store’s shelves are constantly overflowing with dead stock, your COGS will be high — and you won’t have any revenue to make up for it.
That’s why you need to dive into your POS system’s reporting dashboard to learn your customers’ preferences and shopping habits.
For example, if your reports show granola bars flying off the shelves while produce wilts in the cooler, you should invest more money in stocking shelf-stable snacks to meet demand.
Take Charge of Your Small Business’ Success With POS Nation
Understanding your average COGS is fundamental for retail success — but without the right tools, calculating it can be tough.
Fortunately, a powerful POS system like POS Nation can make it seem effortless.
POS Nation offers in-depth inventory management and reporting tools to help you understand the value of your inventory, manage your relationships with vendors, and keep a constant eye on your revenue.
With these insights right at your fingertips, you’ll be more prepared than ever to make informed decisions to minimize your costs and maximize your profits.
Ready to see how POS Nation can transform your small business? Schedule your live demo with one of our retail experts today.
