What is the COGS to Sales Ratio?

Profitability Measures

Cash is king! but profit generates excess cash. And this means that understanding underlying profitability is critical to a healthy and sustainable small business. Understanding leaks in profitability and the cause of them is a great tool to have. 

COGS to Sales Ratio

The COGS to Sales ratio is a great indicator helping you diagnose areas of your business that may be changing. And if, for instance, your Gross Profit Margins are falling, this could be for lots of reasons. One of these is the relative cost of all the things that go into making your product.

What does it mean?

A key measure in understanding your profitability changes, is the COGS to Sales ratio. This ratio tells you the relative importance of your direct input costs to your sales revenues. Therefore, if your ratio is decreasing, this indicates that your direct costs are increasing relative to the sales reveues. Check your COGS to sales ratio now with Jazoodle

How we derive COGS to Sales ratio?

Definition used:

Costs of Goods Sold (amount) Divided by:

Total Income from operations (amount)

eg: Cost Of Goods $20,000, Sales $35,000 

COGS to Sales equals 20,000 / 35,000 [times 100] = 57%. Thus, your direct costs make up 57% of your revenues.

How Can I Improve My COGS to Sales Ratio?

If your margins are falling, the answer could be a rise in the relative cost of your inputs (goods and labour). The COGS to Sales ratio indicates this. To improve it, there are a few things you can try or assess further:

  • Negotiate better cost of goods terms with your suppliers.
  • For direct labour costs increases, are you becoming less efficient in the making of each finished good or service? Assess measures such as overhead and net profit per employee – you may be over staffing

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