120 | How to Write a business Plan
cost of the goods available for sale. While there are a number of different theories on which cost figure to use (the latest or the earliest), the critical thing is to make sure you do it the same way every time. Then, you can make accurate comparisons from year to year. Of course, if you have a service business or business with no inventory, the inventory valuation discussion is moot. After you have developed a total dollar value of the goods you have on hand, you can calculate your real cost of sales this way: 1. Add together the goods you purchased during the period and the inventory amount at the beginning of the period. (This total represents the dollar value of the goods you had available to sell during the period.) 2. From that amount, subtract the dollar value of the inventory at the end of the period. 3. The difference is the cost of sales for the period. Here’s an example that demonstrates how you do this:
Cost of Sales Beginning Inventory from physical count Add: Purchases during period
$ 10,000 + 30,000
Subtotal: Goods available for sale Less: Ending Inventory from physical count Cost of Goods Sold during period
40,000 –
15,000 $ 25,000
This calculation has more use than merely filling out IRS forms: It can let you know when someone is stealing from you. Suppose you have a good estimate of what the cost of sales percentage should be, either from past statements or from a good understanding of your business. Suppose further that you expect a cost of sales of 61.5% and that you actually had a cost of sales of 77.3%. What does that mean? It could mean that some of the merchandise you buy for resale is leaving the store without any money entering your register. At any rate, it means that you need to do some serious research to find out what is really happening. ■