5 Common Mistakes Small Businesses Make with COGS
- Irvine Bookkeeping
- Apr 10
- 5 min read
Running a small business means you're balancing a million things—customer orders, marketing initiatives, perhaps even a leaky office sink. The catch is that all your effort could be for nothing if your Cost of Goods Sold (COGS) isn't on point. Trust me, COGS errors are among the most stealthy profit-killers around. I have spent years helping companies just like yours navigate financial traps. This post will explain the five typical errors small businesses make with Cost of Goods Sold, their causes, and how to avoid them to boost your company profitability.
What Is Cost of Goods Sold?
First things first: what’s Cost of Goods Sold? It’s the direct cost of producing what you sell—think raw materials, labor, and production expenses. Subtract COGS from your sales, and you’ve got your gross profit. Simple, right? Not quite. Mess up your COGS, and your financial management takes a hit. Ever asked yourself, “Why aren’t my profits adding up?” Stick with me—we’re about to find out.
Mistake #1: Misclassifying Expenses in COGS
Let’s start with a classic blunder: stuffing the wrong expenses into your Cost of Goods Sold. I’ve seen business owners toss everything from rent to their Netflix subscription into COGS. Spoiler alert—that’s a no-go.
Why It Happens
It’s easy to think, “If it’s a business cost, it’s COGS.” But COGS is only for direct production costs—like the leather for your handmade bags or the flour for your artisan bread. Overhead like utilities or ads? That’s a different bucket.
Real-World Example
Picture a candle maker. Wax, wicks, and the part-time helper pouring molds? That’s COGS. But the website hosting fee? Operating expense. Mixing them up inflates your COGS, shrinks your margins, and clouds your business profitability.
How to Fix It
Sort It Out: Grab your business bookkeeping records and split direct costs from overhead. A spreadsheet works fine.
Test Each Expense: Ask, “Does this make my product?” If no, it’s not COGS.
Seek Clarity: Still fuzzy? An accountant can straighten it out in one call.
Mistake #2: Poor Inventory Management
Raise your hand if inventory management feels like herding cats. Guilty? You’re not alone. Sloppy inventory tracking is a top COGS mistake—and it’s a silent profit thief.
Why It Happens
Many small businesses wing it—scribbling counts on napkins or skipping them altogether. When your inventory’s off, your COGS calculation turns into a guessing game.
Common Question: “How Do I Know If My Inventory Is Screwing Up My COGS?”
Easy. If your stock doesn’t match sales records or you’re always “out” of hot items, your inventory management is off. That means your COGS is too—either too high or too low.
Practical Tip
Count Regularly: Monthly or quarterly counts keep you grounded.
Tech Helps: Tools like Square or Shopify sync inventory with sales for accurate COGS.
Example Win: A t-shirt printer I know slashed COGS errors by 15% with weekly scans. Small tweak, big results.
Mistake #3: Ignoring COGS Calculation Consistency
Here’s a sneaky one: flip-flopping how you calculate Cost of Goods Sold. One month it’s FIFO (First In, First Out), the next it’s LIFO (Last In, First Out). Sound familiar? Inconsistent methods wreak havoc on your business accounting.
Why It’s a Problem
COGS drives your business profitability. If you keep changing the rules, your profit margins look like a rollercoaster—impossible to trust or plan with.
Real-World Scenario
A toy maker I advised switched methods whenever prices spiked. Result? COGS jumped 12% randomly, confusing their investor pitch. Consistency matters.
Actionable Advice
Choose One: FIFO’s easiest for most—stick with it.
Lock It In: Write it down in your business bookkeeping playbook.
Check Trends: Review COGS monthly to ensure it’s steady.
Mistake #4: Overlooking Hidden Costs
Ever scratched your head wondering why your business profitability lags despite killer sales? Hidden costs might be sneaking into your COGS—or worse, getting ignored entirely.
Why It Happens
Small stuff like shipping fees, packaging, or spoiled goods feels trivial. But pile it up, and it dents your gross margin errors big time.
Common Question: “What Hidden Costs Should I Watch?”
Think freight for supplies, defective items, or even the bubble wrap you ship with. They’re all COGS players.
How to Fix It
List It All: Jot down every production-related cost. Add it to your COGS radar.
Track Tiny Expenses: Use expense tracking apps to snag the $3 here, $8 there.
Example: A soap maker caught shipping costs doubling her COGS. Bulk deals cut it by 12%.
Mistake #5: Neglecting Regular Bookkeeping Reviews
Let’s be honest—business bookkeeping isn’t why you started your company. But skipping regular COGS check-ins is like ignoring a leaky pipe. It’s fine until it floods your profits.
Why It Happens
You’re swamped—new clients, product launches, life. Bookkeeping gets pushed to “someday.” Then tax season hits, and your COGS is a jumbled mess.
Common Question: “How Often Should I Review My COGS?”
Monthly is gold—weekly if you’re growing fast. Quarterly’s the bare minimum, but don’t skimp if you can help it.
Why It’s Worth It
Regular reviews catch errors early. I once helped a caterer spot a $2,000 COGS overstatement from a typo—found it in a 15-minute review. That’s money back in their pocket.
Practical Tips
Schedule It: Block 30 minutes weekly or an hour monthly. Treat it like a client meeting.
Automate: Software like QuickBooks flags COGS oddities for you.
Benchmark: Compare your COGS to industry norms (e.g., 65% of sales for food businesses). Out of whack? Dig deeper.
Example Fix: A florist started monthly reviews and found $500 in untracked spoilage. Adjusted COGS, better profits.
Take Charge of Your COGS Today
You’ve got the lowdown on the 5 common COGS mistakes. Ready to fix them? Here’s your DIY roadmap:
Reclassify Expenses: Split COGS from overhead in your business accounting.
Master Inventory: Count stock often and lean on inventory management tools.
Stick to a Method: Pick a COGS formula and stay consistent.
Find Hidden Costs: Track every production expense with expense tracking.
Review Regularly: Make bookkeeping tips a habit—your profits will thank you.
You can totally handle this solo if you’ve got the bandwidth. But if time’s tight or numbers stress you out, there’s an easier way.
Irvine Bookkeeping: Your COGS Lifeline
Why wrestle with Cost of Goods Sold when you could focus on growing your business? At Irvine Bookkeeping, we’re pros at business bookkeeping for small and mid-sized firms. Using top-notch software, we keep your COGS spot-on, your inventory tight, and your financial management crystal clear. Save time, dodge errors, and sleep better knowing your numbers are rock-solid. Want to chat? Grab a free consultation today—your business deserves it!
Wrap-Up: Your COGS, Your Future
Getting Cost of Goods Sold right is about creating a successful, lucrative company as much as it is about preventing COGS errors. Correct these problems to witness more clear corporate profitability, wiser choices, and less disorder.
Comentários