A Beauty Salon is typically service-based, but can also sell retail products related to their services. Such products can be cosmetics, hair treatment products, and the likes.
You must understand the cost of goods sold for your salon and how it affects your general business performance. If you ignore it, you’re most likely not going to maximize your business profit.
What is the Cost of Goods Sold?
Cost of Goods Sold (COGS) is the total cost of acquiring and selling a product. It entails all the expenses incurred in manufacturing or purchasing, processing, packaging, and delivering a product.
You are required to fill in the COGS in your business’ Profit and Loss statement and also the tax return. As such, it is only wise that you are careful enough to keep track of all the details of your expenses.
For your beauty salon, COGS includes the cost of purchasing the products you resell and other direct expenses involved in the sales, such as shipping.
Note that COGS is calculated for good actually sold and not just the inventory available for sale.
Why is COGS Important For a Beauty Salon?
The COGS helps you determine one of the most important factors that affect business profit – your pricing.
For instance, if you forget to include the cost of shipping salon products down to your client, you’ll most likely sell them cheaper than required. If you overestimate the costs, you might pick a price too high and scare away potential buyers.
Also, understanding your COGS helps you maximize tax deductions. The more expenses are eligible for deductions, the lesser your taxable income, and the bigger your net profit.
Which expenses are included in COGS?
A more appropriate term for the cost of services you render in your beauty salon is Cost of Services. That is if you do not sell any products at all. But if you retail any products, you need to know what expenses can or cannot be included in your COGS.
A simple test to help you determine what should be part of your COGS can be summarized in two questions:
- Are the costs directly related to product sales? That is, will the costs still be incurred if I don’t sell any products?
- Are these expenses affected by changes in sales? That is, do they increase or decrease with variations in the volume of sales?
Note also that indirect expenses such as rent do not have direct consequences on daily sales and so, do not factor in COGS.
How to Calculate the COGS?
The COGS over some time is gotten from a few major figures. These include the beginning inventory, the total cost of inventory acquired within the time, direct expenses, and the ending inventory.
The formula for COGS is quite simple.
COGS = (Beginning inventory + Total Cost of Inventory purchases + Other Direct Expenses) – Ending Inventory.
Other direct expenses as indicated above must be directly related to either the acquisition or the sale of the products. Examples include freight in, shipping fees, direct labor, etc.
If your beauty salon is purely service-based without any form of product sales, then you might not have to bother about COGS. Rather, you should be calculating the Cost of Services.