BDC emphasizes correct calculation of cost of goods sold for business health

The Business Development Bank of Canada (BDC) has provided guidance emphasizing the critical role of accurately calculating the Cost of Goods Sold (COGS) in evaluating a company's financial performance and profitability.

Alex Barros, a Business Advisor with BDC Advisory Services, stated that COGS represents the direct costs associated with producing a product, including raw materials and labor. This figure is a key component of the income statement and helps determine if a company is making money from its products. Barros noted that many businesses miscalculate COGS, leading to a distorted view of their true cost structures.

The calculation for COGS is: raw material costs + labor costs + all other direct costs to make the products sold during the period. It excludes expenses like marketing, sales, or distribution, which are considered operating expenses regardless of production volume. BDC recommends that businesses meticulously review and allocate their expenses on their income statements.

Barros stressed that incorrectly classifying costs, such as including fixed expenses in COGS or assigning variable costs to Selling, General, and Administrative (SG&A) expenses, prevents a company from understanding its actual cost structure. He pointed out that COGS is often the first metric bankers and external observers examine when assessing a business's performance.

BDC offers advisory services to help businesses improve their cost accounting and ensure proper expense allocation. The bank underscores that understanding the cost to deliver a product is a fundamental question for any business owner.