The correct recognition of cost of goods sold amount for a small businesses is a difficult and challenging task. The small businesses are at their growing phase of its lifecycle thus unavailability of competent staff made the correct amount of cost of sales very challenging.
It is very important for every business entity at its growing phase to make special arrangements in order to keep tight control on the cost of goods sold and proper allocation of amounts to cost of sales. This would depict the crystal clear picture and financial health of the business entity.
Calculation of cost of goods sold for a small businesses
The method for calculation of cost of goods sold for small industry is based on similar principles. Purchases made during the period should be added to the inventory counted on the stock count at the start of the financial period or at the end of previous period.
This gives the total available purchases for consumption during the period, the deduction of the total closing value of inventory from the total purchases gives the amount of inventory used during the period or cost of goods sold for the period.
Costs that cannot be included as cost of goods sold
The businesses at its growing phase of life cycle does not bother to follow the guidelines set by international accounting standards because of unavailability of professional staff, this may distort the financial health of the business entity.
Thus the owner of small businesses should provide to its staff sufficient training so that proper allocation of costs to in its relevant accounts could be managed i.e all types of indirect expenses and overheads should not charge in cost of sales.
Nature of cost of goods sold for small businesses
The nature of cost of goods sold amounts depends on the nature of business entity in which it deals. Small business exists in any sector of the economy because every business starts its career as a small business and grow in size with the passage of time.
For example the pioneer of e-business Amazon was also a small business when it only sells the books online, however with passage of time and after gaining enough experience in online business it also started to sell other items as well on its electronic store and now became the largest electronic store on the globe.
Information for decision making
The operation of most of the small businesses are handle by the owner of the business so it very important to know combination and nature of cost that makes the cost of sales.
The business owner or the management can increase the profitability of the business while keeping an eye on that portion of cost of sales that can be reduce quite easily.
Types of small businesses
The small businesses can be of any type, depends on the which sector of the economy it deals in. Every industry have a small and medium businesses, registered companies, multinationals as well as global companies.
Taxes of small businesses
In some economies of the world, the small businesses are exempt from paying any tax like in Pakistan the cottage industry is exempt from tax. Authorities allow exemptions to small entities in order to provide equal playing field level because the larger entities can easily take benefit from economies of scale.
In order to take such benefits from exemption and subsidies, the employer should employee or consult the highly qualified tax consultants who are well conversant in taxation matters.
Impact on the financial statements
The decision making authority of a small business should be enough competent to take decisions based on calculative risk that is beneficial for the organization. In order to take decisions the management should be having competent and reliable information.
It is very difficult for a business organization being a smaller size to get a competent information for decision making purposes, thus it should consult with the business journal of the leading entity in order to take a good idea about the success of the market leader.
The conclusion of the article is that all business organizations must keep an eye on the cost of goods sold and try its best to minimize it to the possible extent.
It is specially more important for a small and medium business entities to keep a check on the change in cost of goods sold and also on the proper allocation of costs to the cost of sales as well as other costs.