Cost of Goods Sold: Know Your Bottom Line and Your Actual Inventory Value

Try looking up your inventory value right now. Is the number suspiciously low? If so, your inventory value is probably misleading you. It’s not because the system is calculating incorrectly. It’s because the inventory value is based on the cost price of your items, and if those cost prices have never been entered, the system simply doesn’t have the numbers it needs to calculate correctly. The result is a store that, on paper, looks less profitable than it actually is, and a bottom line that you’re effectively blind to.

The new “Cost Prices” page under “Inventory” fixes this. It gathers all your items in one place, shows where cost prices are missing, and makes it quick to fill in the gaps. Once the cost prices are in place, two absolutely crucial figures finally become accurate: your profit margin per item and the value of your entire inventory. These are figures you use every single time you set a price, plan a sale, or close out your books.

See your actual profit margin on every single item

Sales statistics without cost prices only tell half the story. You can see what you’ve sold for, but not what you’ve earned. And revenue isn’t the same as profit. An item that sells well could easily be the one that earns you the least, while a quiet seller in the background accounts for all your earnings.

With cost prices in place, the system can calculate the contribution margin—that is, what’s left after the purchase price is subtracted from the selling price. Suddenly, you can see it clearly:

• Which products are actually making money, and which ones are practically working for free.
• Which brands and suppliers give you the best markup, so you know where to buy more and where to renegotiate.
• Where there’s room to offer discounts, and where there isn’t a single krone to spare.

That’s the difference between running a store based on gut feelings and running it based on numbers. And it’s those numbers that determine whether the bottom line for the year will be in the black or in the red.

An inventory value you can stand behind when meeting with your accountant

Your inventory isn’t just boxes on a shelf. It’s an asset on your balance sheet—real money you’ve tied up in goods. That’s why inventory must be accurately reported in your financial statements, and it must be valued at cost using the lower-of-cost-or-market principle. If you don’t, the error affects multiple areas at once: incorrect inventory on the balance sheet, incorrect cost of goods sold in the income statement, and an inaccurate net income for the year.

An incorrect inventory value is not a harmless spreadsheet error. It carries through your entire financial statements and can trigger questions during the audit that you’d rather avoid. And an inventory value that’s set too low makes your business appear to be worth less than it actually is. This can cost you dearly in the very areas where it hurts the most:

• When the bank is evaluating you for a loan or line of credit.
• When the business is up for sale or being valued.
• When key financial ratios and solvency are scrutinized.

With accurate cost prices, the inventory value becomes a figure you can present with confidence, rather than a number you cross your fingers no one will look at too closely.

Better prices and promotions that actually make you money

Pricing without knowing your cost price is like negotiating blind. You don’t know where your bottom line is, so you risk either giving away too much or holding back on a discount you could easily have offered.

In the run-up to major sales days like Black Friday, knowing your limits in advance is invaluable. When you know exactly what each item cost you, you can set promotional prices that still turn a profit, rather than discovering afterward that a few bestsellers sold at a loss. Cost prices turn your sales into a calculated decision rather than a leap of faith.

Overview of Tied-Up Capital

How much money do you actually have tied up in inventory right now, and in which items? For many store owners, the answer is surprising. Once your cost prices are in place, you can clearly see your tied-up capital, and this is often where liquidity is hiding. Items sitting idle with a lot of money tied up in them are funds you could have had in the register or spent on items that actually sell. This overview makes it easier to clean out your inventory with your head, not just your gut.

You’re in control, and customers don’t see a thing

Cost prices are your numbers, and they should stay with you. That’s why security is built in from the ground up:

• Cost prices are never shown to your customers. They’re for you and your accountant only.
• The system never changes your inventory value on its own. You decide when and for which items the value should be recalculated, so you’re never surprised by a number you didn’t initiate yourself.

You’re in the driver’s seat the whole way. Cost prices give you insight without taking control away from you.

Here’s how it works in practice

The idea of having to enter a cost price for every single item might sound overwhelming if you have a lot of SKUs. It isn’t. The Cost Prices page is designed to get you to your goal quickly, without having to start from scratch:

• Suggestions based on your own data. The page suggests the most recent known purchase price for the item, so in many cases, you just need to approve it rather than guess.
• Bulk entry. Select a group of items and enter them all at once instead of one by one.
• Import from Excel. Do you have your supplier’s price list in a spreadsheet? Then you can import the cost prices via CSV import and save hours of manual work.
• Warnings that catch errors. If a cost price ends up higher than the selling price, the page alerts you to it, so typing errors don’t sneak into your accounting.

You don’t have to do it all in one day. Start with your best-selling items or your largest supplier, and build from there. Even partially filling out the data will give you a more accurate picture than you have today.

Get started

You’ll find “Cost Prices” under “Inventory” in your admin panel. Set aside half an hour, use the import feature or the suggested purchase prices to get through it quickly, and recalculate the inventory value when you’re satisfied. Afterward, you’ll have sales statistics that show your actual profit margin and an inventory value you can confidently present to both your bank and your accountant. These are some of the most valuable minutes you can spend on your store’s finances.

Frequently Asked Questions