The correct recognition of the cost of goods sold amount for small businesses is a difficult and challenging task. Small businesses are at the growing phase of their lifecycle thus unavailability of the competent staff made the correct amount cost of sales very challenging.
It is very important for every business entity in its growing phase to make special arrangements in order to keep tight control over the cost of goods sold and proper allocation of amounts to the cost of sales. This would depict the crystal clear picture and financial health of the business entity.
In this article, we are going to discuss how to calculate the cost of goods sold for small businesses, explain the nature, and many more.
Calculation of cost of goods sold for a small businesses
The method for calculation of the cost of goods sold for the 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 the previous period.
This gives the total available purchases for consumption during the period, and the deduction of the total closing value of inventory from the total purchases gives the amount of inventory used during the period or the cost of goods sold for the period.
Costs that cannot be included as a cost of goods sold
Businesses at their growing phase of the life cycle do not bother to follow the guidelines set by international accounting standards because of the unavailability of professional staff, this may distort the financial health of the business entity.
Thus the owner of small businesses should provide its staff with sufficient training so that proper allocation of costs in its relevant accounts could be managed i.e all types of indirect expenses and overheads should not charge in the cost of sales.
Nature of cost of goods sold for small businesses
The nature the cost of goods sold amounts depends on the nature of the 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 grows in size with the passage of time.
For example, the pioneer of e-business Amazon was also a small business when it only sells books online, however with the 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 small businesses is handled by the owner of the business so it is very important to know the 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 the cost of sales that can be reduced quite easily.
Types of small businesses
Small businesses can be of any type, depending on which sector of the economy it deals in. Every industry has small and medium businesses, registered companies, multinationals as well as global companies.
Taxes on small businesses
In some economies of the world, small businesses are exempt from paying any tax in Pakistan the cottage industry is exempt from tax.
Authorities allow exemptions to small entities in order to provide an 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 employ or consult 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 make decisions based on the calculative risk that is beneficial for the organization. In order to make decisions, the management should be having competent and reliable information.
It is very difficult for a business organization of a smaller size to get 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 their best to minimize it to the possible extent.
It is especially more important for small and medium business entities to keep a check on the change in the cost of goods sold and also on the proper allocation of costs to the cost of sales as well as other costs.