For new businesses and startups, accurately calculating COGS is essential for several reasons:
Profitability Analysis: COGS is subtracted from revenue to determine the gross profit. A high COGS can significantly reduce profitability. Pricing Strategies: Understanding COGS helps in setting the right pricing strategy. Entrepreneurs must ensure that the selling price covers the COGS and provides a reasonable profit margin. Inventory Management: Tracking COGS helps in managing inventory levels and costs efficiently. Tax Implications: COGS is deducted from total revenue when calculating taxable income, thus impacting the amount of tax to be paid.