It’s hard to keep relevant when you run an offline retail business.

Having an online store isn’t the exception, it’s the expectation, and when websites and commerce aren’t a part of a business strategy, it becomes increasingly difficult to remain resilient.

For instance, a recent IBM Retail Index report found the pandemic accelerated the shift toward ecommerce by roughly five years.

Meanwhile, in-store Black Friday sales dropped off a whopping 28% between 2021 and 2020 while online sales surged by 21% in the same period.

To adapt, many offline business owners find themselves launching online stores for the first time.

Others are making it easy for customers to order online and do curbside pickup.

And the savviest are experimenting with omnichannel selling, using their website to manage sales on Facebook, Instagram, and the other places their customers already spend their time.

If you haven’t done so already, the evidence is clear that it’s time to bring your brick-and-mortar store online.

In this post, we’ll walk you through everything you need to have a successful transition to selling online.

Table of contents

1. Research your ecommerce strategy

There are a variety of websites and tools you can use to understand consumer online shopping habits. Some sites that provide these insights for free through their blogs include eMarketer, McKinsey, PWC, Comscore, Pew Research, Nielsen IQ, and Think With Google Research Tools.

Take some time to research:

• How do your target customers prefer to shop online?
• When are they most likely to shop?
• Which channels are they most likely to use to discover your site?

For example, your target customers may prefer using a mobile device versus their desktop. Others might prefer to contact your store online through text messages rather than email.

Knowing this will help you to choose the right ecommerce platform to build and host your website, and create customer experiences that meet or exceed expectations.

Install a web analytics tool to learn as you go

Moving beyond third party research, using a website analytics tool will show you how people actually interact with your site:

• How your customers shop on your website after you launch
• What are your most popular product pages
• How they find your site through channels like search, social media, and blogs or traditional media sites

Google Analytics is free and is a popular option for many small business online retailers. To get started, watch this video which highlights some primary uses and benefits.

Ask your existing customers for help

If you already have a social media presence to promote your physical stores, you can also reach out through that channel to ask what your customers are looking for in an online store.

Their comments on various social channels can also give you insights into which products are the most popular and which ones they’d be likely to buy from you online.

Additionally, you can post an online survey on your social channels to find out what they might want in an ecommerce solution. Tools SurveyMonkey or Google Forms are an excellent place to start.

If you already have a customer email database in place, you can also send the survey out through that channel. It’s helpful to offer an incentive to get people to answer your questions, such as a gift card giveaway contest or a coupon code to use once your new site is live.

Research competitive ecommerce sites

Finally, take a look at your top competitors’ ecommerce websites and social media channels to see how they are targeting customers through savvy copywriting, design, and photography.

Make a list of the strengths and weaknesses of each site so that you can iterate on what works well for them and improve on what doesn’t.

2. Choose a reliable ecommerce website builder and hosting service

Once you’ve researched your market, the next step is to invest in the design, build, and launch of your ecommerce storefront.

Select and purchase a domain name

Likely, you’ll want a domain name that is an exact match to your business.

If the domain name you want is already taken or is too expensive, try for an abbreviated version of the name, or a different extension, such as .shop or .store for general ecommerce, or get more specific with .jewelry, .clothing and .coffee.

The price to purchase a domain name typically ranges from $2 to $20. However, there can be hidden costs. Refer to our domain name guide for more details on what to expect.

You can play around with different domain name options via this search box:

INSERT DOMAIN SEARCH BAR HERE

After you’ve selected a memorable URL, you’ll need to find a reliable website hosting service.

Many services — like GoDaddy’s online store — offer tools to build your own website for free.

Some things to look for in an ecommerce platform:

Accessibility: Your website hosting and design service provider should offer affordable (free or for a monthly fee), and easy-to-use templates. That’s for both an intuitive front-end design for customers and a back-end dashboard for managing orders and inventory.

They should also offer a variety of payment solutions and, preferably, a flat fee for service charges.

Customizability: Since it can get expensive to hire a graphic designer and website developer, the design templates offered by your service provider should be easily customizable and intuitive for anyone without a coding or design background.

Mobile-optimized: According to Oberlo, “nearly three out of every four dollars spent online today happen through a mobile device.” That’s why it’s critical that you select a mobile-optimized design theme and template for your new online store.

Payment Card Industry (PCI) compliant: Since credit card fraud and security breaches are a constant threat to ecommerce businesses, it’s crucial to find a service provider, like GoDaddy Payments and Online Store Builder, that comes with PCI compliance built into its ecommerce solution.

The business must also follow proper technical and operational standards, monitored by the PCI Security Standards Council, to secure and protect the data provided by credit cardholders which are transmitted through card processing transactions.

Secure sockets layer (SSL) certificate: SSL is a security protocol that creates an encrypted link between a web server and a web browser. When customers see a tiny lock icon beside your domain name URL in their web browser, they’ll rest assured that their online transactions and information are both private and secure.

Keep in mind that a robust, templated ecommerce store building solution should be available in one quick install, and should include:

• An affordable website template/theme
• Product pages
• Shopping cart
• An encrypted payment processing solution
• Secure hosting for your site

3. Select an enticing store theme and template

Once you’ve selected your URL and platform, you’ll need a theme to suit your online store’s functionality and branding needs.

GoDaddy Online Store Builder offers multiple solutions to accommodate a variety of businesses — from selling goods and services to allowing customers to book appointments online.

If you’re on a tight budget, start with a free theme or basic paid package (starting at $14.99/month) and re-evaluate your needs over time.

If you already have a managed WordPress website, you can also integrate WooCommerce themes and extensions to build an ecommerce storefront for your brick-and-mortar store that processes transactions using GoDaddy Payments.

Once your visual design is sorted, invest heavily in product descriptions and photography to appeal to as many of your visitor’s senses as possible.

If you’re creating copy and taking photographs yourself, here are  Just be sure you have the time to learn how to do it properly by watching videos or reading blogs on popular ecommerce sites.

4. Carefully select the products you want to sell online

While you already sell products in-store, you’ll need to decide which products to sell online. Between shipping, packaging, and a number of other factors, the margins on selling your products online can be very different than what you’re used to.

In those cases, you might want to take customer payments online but offer curbside pick-up, instead. You can also offer bundled solutions like the example below.

Other product and shipping considerations

When putting together your online product sales plan, ask yourself the following questions:

• Will you feasibly be able to package your products yourself, or will you need to employ someone to help you with it? If so, then budget that cost into your shipping fees.
• How are you going to store and track your inventory? You’ll need inventory-tracking software — ideally built into your ecommerce hosting and design solution. You can also use your stock room if you already have a physical storefront. Otherwise, you’ll need some sort of product storage solution.
• How, when, and why are you adding new products to your website? Be strategic about adding the right items and consider seasonal sales items and discounts.

5. Choose your online sales channels

For example, you might want to sell and ship products exclusively online. On the other hand, you might want to offer customers the option of buying your products online and then coming to your store for curbside pickup.

In fact, “85% of shoppers have increased curbside pickup” since the pandemic started. And many of them want that pickup process to be completely contactless.

You can also offer contactless payment and other online shopping solutions in-store for customer convenience and safety.

Of course, the reverse can also be true where you can also have “online exclusive” products which can be used to encourage your in-store customers to shop online.

Select ecommerce payment providers

There are many options to choose from when selling online. The most common way is to sell your products via an online store or to add ecommerce functionality to your WordPress blog using WooCommerce.

In either case, you need a domain name and checkout page where customers can complete their transaction via their credit or debit card or using their preferred third-party payment provider like PayPal, Apple Pay, or GoDaddy Payments.

Many small businesses prefer to use a third-party payment provider. That’s because it minimizes your security risks by storing customer credit card data through an encrypted service via the payment provider and not on your site.

GoDaddy Payments lets small businesses sell via all major credit card and debit card providers, including Visa, Mastercard, American Express and Discover. It comes with advanced online encryption while maintaining the strictest payment card industry (PCI) compliance standards.

Likewise, your payment product questions and issues are managed 24/7 by GoDaddy’s customer support team.

GoDaddy Payments also offers the lowest fees (2.3% + 30¢ per online transaction) compared to other leading providers, and the money arrives in your account by the next business day. As a bonus, there are no long-term contracts, monthly minimums, or surprise fees to worry about.

It’s easy to set up your account in minutes, and you can manage all of your orders, inventory, customer reviews, and email in one place using the GoDaddy Online Store dashboard.

6. Consider your online payment solutions

If you don’t have the time, money, or resources to launch an ecommerce store right now, you can still sell online to customers using other sales channels.

GoDaddy Payments recently launched a variety of online sales solutions for small businesses.

Sell anywhere with shareable pay links

If you do most of your business with customers via text messages, email, social media or over the phone, you can process transactions using a customizable GoDaddy Payments Online Pay Link. Simply add your store branding and the cost of the transaction, then easily create and share a pay link with customers in minutes.

You can even transform a pay link into a scannable QR code with one click. Then post it or let customers print it anywhere to scan and pay in person quickly.

Via your GoDaddy Payments dashboard, select Pay Links and enter the price, description, and image for your payment request. Then, send your newly created payment link to your customer (through your preferred sales channel), and it’ll take them to a secure checkout page to complete their purchase.

After your customer completes the transaction, you’ll get paid by the next business day.

Related: GoDaddy Payments — Now available with Online Pay Links and Virtual Terminal

Turn your phone or computer into a virtual terminal

The new GoDaddy Payments Virtual Terminal allows you to accept credit card payments right from your computer, tablet, or smartphone.

It’s a simple, secure way to get paid when your customers aren’t standing in front of you (e.g., collecting credit card info over the phone). And you don’t need any extra hardware like a card reader to complete the transaction.

Simply log in to your GoDaddy account and open Virtual Terminal on your Payments dashboard. Then, take your customer’s credit card info, type it into Virtual Terminal, and confirm the charge. Again, you’ll receive your payment by the next business day.

Get a point-of-sale (POS) system for contactless payments

The global pandemic has also influenced a dramatic shift away from in-person cash payments to contactless payments. As a result, small businesses should look for innovative point-of-sale (POS) systems that allow them to evolve with their customers’ in-store payment preferences.

GoDaddy’s POS system offers a variety of payment hardware solutions, including contactless payments, with the lowest transactional fees (2.3% + 0¢) per in-person transaction.

It allows you to quickly and easily take credit and debit card payments, plus contactless payments with Apple Pay and Google Pay. Then you can track it all in your GoDaddy dashboard.

Additionally, you can connect GoDaddy’s POS with your GoDaddy Online Store to help unify and expand your selling and enable customers to buy online, pick up in-store, or book online and pay in-person.

You’ll also benefit from the following hardware solutions:

Dual screens: GoDaddy’s dual-screen POS makes checkout a breeze. Plus, the all-in-one terminal includes a built-in payment processor, scanner, printer, and security.

Tap, dip or swipe payments: You can use the included charging dock to go hands-free. One single battery charge keeps your sales going longer, and you can connect your Card Reader to your GoDaddy Mobile App to start taking quick and easy payments.

Peace of mind: Every GoDaddy POS checkout is PCI secure, and every device comes with a one-year limited warranty and thirty-day refund.

7. Market your new ecommerce site online and in-store

Once you’re ready to take your brick-and-mortar store online, it’s time to let your customers know about it.

There are several ways you can do this affordably — all of which will require an investment of your time at a minimum.

Encourage customer ratings and reviews

Consumers have always trusted opinions and product recommendations from their peers over advertising or PR messaging.

That’s why you should encourage your ecommerce customers to provide ratings and reviews on your product pages and learn how to appropriately respond to all online reviews — both positive and negative.

To use positive reviews and ratings as a promotional tool for your ecommerce business, refer to our comprehensive guide, which includes some helpful case studies.

Boost your social media activity and presence

Whether or not you already have a social media presence, it’s crucial to start boosting your online social activity and brand profile to drive traffic back to your new ecommerce website.

Creating and sharing valuable social media content is both an art and a science. Luckily we have created lots of content with tips and advice to help you do it properly.

You can start by watching the video below to learn how to think like a digital marketer to reach, engage, and convert customers on social media:

Next, read through our time-saving social media tips for business owners, and learn about other best practices to expand your reach and grow your business.

Build an email marketing database

Email is a highly targeted and effective way to increase ecommerce traffic and sales to your new ecommerce website. Start by gathering customer email addresses both in-store and online once you launch your site (if you haven’t done so already).

To incentivize customers, consider offering a 10% to 20% discount on their first order in exchange for their email opt-in to your newsletter. Then you can contact those customers whenever you’re doing a seasonal promotion or new product launch.

It’s equally important to set up an email report in analytics to help you track how your email campaigns perform in driving new sales transactions and site visits. To learn how, refer to our beginner’s guide to starting an email list.

GoDaddy Online Store Builder comes with built-in email marketing functionality. Have a look at this walkthrough to get started.

Use search engine optimization (SEO)

SEO is a highly effective yet often time-consuming traffic-driving strategy for your new ecommerce store. More than 80% of consumers frequently search online before they purchase a product or service. Likewise, “SEO drives ten times more traffic to a site than organic social media.”

Your best bet is to start small by creating engaging and educational content through a blog or through online videos, and work on building links back to your website through other websites.

To ensure your new ecommerce site appears in search engine results, read our SEO beginner’s guide or watch this video.

Advertise online

Once you’ve begun to build up your site traffic and are more aware of the most popular and highest-rated products on your site, you might want to invest in paid advertising.

Take a look at your website analytics to see which sites drive the most organic traffic to your online store. Then invest in advertising with those sites to drive even more targeted traffic back to your top product pages.

Watch this video for tips on how to get started with paid online ad spending.

Promote your ecommerce site in-store

Be sure that customers who frequently visit or pass by your brick-and-mortar store know about their new online shopping options.

Promote your new domain name on your retail storefront window or awning, shopping bags, receipts and anywhere else that they might see it when they shop in person.

Prioritize customer service

A happy customer is always your best word of mouth marketing tool. If you can’t hire someone to help you with online customer service, then set aside time each day to answer customer emails and phone inquiries, update order statuses, and enter their shipping details.

Before you take your brick-and-mortar store online, ask yourself:

• How will you send shipping confirmations to customers?
• Who will handle phone and email inquiries, how, and when?
• Do you need a separate business phone line?
• How and when should you answer social media questions and comments?

You can save some time by developing and posting an FAQ section on your website, and creating templated email responses to your most common customer inquiries.

It’s time to bring your brick-and-mortar store online

Ecommerce sales are soaring, and customers have accelerated their online shopping habits and preferences because of the global pandemic. As a result, brick-and-mortar stores must re-think their sales strategies.

Even if your retail store sales are solid, it’s time to offer online and contactless payment solutions to satisfy your customers’ evolving shopping needs.

With the right online and in-person sales strategy, using a PCI-compliant provider like GoDaddy Payments, you can rest assured that your customers’ privacy and security are in good hands.

For even more ecommerce tips and strategies, read our post: “How to start an online store.”

Owners of brick-and-mortar stores will be familiar with the physical version of the point of sale or POS, while ecommerce sellers will see online checkouts as their major POS. However, the point of sale has evolved, and its evolution has brought improved utility for both types of merchants.

POS systems can feel intimidating and be non-intuitive, which means shop owners often have to spend precious time figuring out how they work.

However, ecommerce sellers that want to add physical touchpoints beyond their online stores will also need to get familiar with a POS and the ways it can help retail operations grow. It’s worth taking the time to understand the extra features a POS can offer. In the long run, the time shop owners spend getting to know those extra features will pay off in several ways.

Improve customer service

According to a 2020 report by Hyken, 96% of people will leave a business because of bad customer service. With rising customer expectations and stiffer competition, small businesses, in particular, need to find ways to set themselves apart — the POS is one method of doing so.

There are many points at which customer service might fail, like the checkout experience, which plays a huge role in customer satisfaction. In a study from Popspots, 70% of respondents identified the checkout experience as something that influences their perception of a store more than any other factor.

The POS makes up a significant part of the checkout experience. Create a great checkout experience by unifying your online store operations with your in-store experience.

Give customers different options to pay through your POS. Customer forgot their card? No problem — they can pay using Apple Pay or by scanning a QR code.

You can also offer different ways of collecting receipts as some customers might prefer digital receipts, which you can send via SMS text message or email instead of physical receipts.

A POS can also connect seamlessly to your customer data stored in the cloud so that you have instant access to the insights and information you need to help customers.

From the customer’s perspective, you appear well-prepared and able to go that extra mile.

Track and surface essential data in real time

Staying on the topic of data, all business owners need to understand their customers’ behavior and business performance to make improvements and growth plans — and your POS system can help with that.

A POS can help your business keep track of customers and their buying habits, which, in turn, can help you identify items to stock more of or discounts to implement.

Gathering data from POS purchases helps you understand other parts of your business, like what your peak times are, return rates, and chargebacks — all information that assists with simplifying your entire operation.

By accessing customer purchase histories through your POS, you can make custom suggestions for additional purchases based on customers’ buying habits.

For example, if a customer buys a sweater from you and returns for another item, you can recommend more options on the sales floor or as they go through checkout.

This increases your store’s average order value or AOV — enabling you to increase revenue with the same number of customers.

AOV is a signal of customer retention, an important metric for businesses.

Returning customers shows that you provided a good enough customer experience to bring them back. It also means that you can focus more of your marketing budget on bringing in new customers.

Through data gathered from your POS activity, you can also create segmented customer profiles for marketing and targeting purposes.

Improve customer loyalty programs

Improving your customer loyalty program leads to more sales, and integrating the program into your POS makes the process of onboarding your customers smoother. With a good POS system, you can keep your customers updated on all of their discounts and quickly apply them as well.

Let’s look at a practical example. A clothing store might have set up a marketing campaign for the upcoming holiday season. Taking this a step further, you could also identify repeat customers from earlier in the year and offer them additional discounts on top of your existing program. Sending festive discounts during the holiday season could entice customers to pick your store over the competition during the most important sales season.

Integrate your POS system with loyalty programs and track each customer’s purchase history, shopping preferences, and buying patterns to reward the most active ones.

Offering customers discounts or free shipping at checkout based on their information will delight them and encourage revisits. Including specialized offers tailored to their specific buying habits (early access to a new product or little gifts at the holidays, perhaps?) is also part of making customers feel special.

Optimize inventory tracking and management

Sales and inventory are tightly woven, which is why the majority of modern POS systems offer inventory management features. For multichannel sellers, a POS system should let you view how much you have of an item and, if you have more than one location, which locations have it. An accurate and easy stock-tracking system is needed to keep a handle on your inventory levels and understand how and where your business is growing.

To avoid the nightmare of an online customer ordering the last of a product just as another customer buys it in your physical store, create a product catalog in your POS that lists each item with its attributes and available quantity.

This way, you and your employees can quickly and accurately access information about products your customers are looking for to find whether it’s in stock — all without having to leave the customer’s side.

With proper inventory-to-POS integration, you’ll always know which products are or are not in demand by the number of sales. Low-stock alerts while a customer is checking out will help you keep hot items on your shelf. Alternatively, alerts about slower-moving products will let you know when to offer discounts to help move stock or remove them from your shelves.

Find a POS that scales with your business

If you’re looking to create or improve your physical stores, your POS should be scalable and adaptable with the tools and integrations to help your business grow, no matter its size.

This article was originally published on Feb. 22, 2016, and was updated on Jan. 20, 2022. 

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Managing cash flow is critical to the ongoing health of your small business. Unfortunately, many entrepreneurs struggle to do so effectively.

Lending Tree reports that almost 30% of small businesses blame “running out of cash” as a major contributor to their startup failure. Almost 20% say they went under due to pricing or cost issues.

Calculating and understanding your cost of goods sold (COGS) will help you to better understand your small business cash flow, and set you up for long-term success.

In this post, we’ll explain what the cost of goods sold is, how to calculate it, and how to report it during tax season.

What is cost of goods sold (COGS)?

Your cost of goods sold includes the direct costs associated with the production of the products your small business sells.

Your direct costs are most often the inventory purchased to make or sell products to customers. But there are other purchased items and indirect costs (like overhead costs) that can be included in your COGS calculations, which we’ll get into shortly.

What counts under COGS?

If you own a donut franchise, for example, you’d include the following in your COGS calculation:

• The direct inventory cost of manufacturing the donuts, including the regular purchase of baking soda, flour, sugar, and yeast.
• Any tools you need to operate while making a donut — from pots and pans to fryers and stand mixers.
• Indirect costs like employee wages to make the donuts, utility bills for things like water (if it’s in the recipe), or rent paid for a manufacturing facility.

What’s not included in COGS

If you are a small business owner who doesn’t manufacture your own products, your cost of goods sold typically would not factor in your indirect overhead costs (or operating expenses) incurred to run your business.

For example, when you purchase inventory from other vendors for resale, your indirect costs might include the monthly cost to rent your storefront or to keep the lights on.

Likewise, you do not need to include anything in your COGS calculations that goes into your cost of revenue, meaning the total amount you invest to sell products to customers. These costs include line items like your marketing and product distribution expenditures.

It’s always best to check with an accountant or tax expert to learn what direct and indirect costs should or shouldn’t be included in your COGS calculation.

Why service-based small businesses don’t use COGS

When doing COGS calculations, business owners must itemize the inventory they purchased (within a set time period) to manufacture or sell their products to customers.

That’s why most service-based businesses, like freelancers, consultants, and service-based software do not typically use COGS when preparing financial statements.

Of course, there are some exceptions, like a hairdresser who might sell items in-store such as shampoo, hairstyling products, and anything else that is part of their inventory as a good to be sold.

Why small businesses should care about COGS

From a tax perspective, you need to know your cost of goods sold — broken down into different line items on your business income tax form — so you can report it to the government. We’ll get into income tax reporting for COGS later in this post.

From an accounting and finance perspective, small business owners must also understand your break-even point and determine the lowest price you can set for your products to keep your business running smoothly.

COGS plays a crucial role in determining those factors, as well as in managing cash flow and finding cost savings.

For help with calculating your break-even point, read: “What is break-even analysis.” You might also want to learn more about cash flow forecasting for small businesses, and understand how to avoid cash flow problems.

How to calculate cost of goods sold

To calculate your cost of goods sold, you first need to understand the total amount of inventory and other relevant costs (if you’re a manufacturer) you regularly spend for the products you sell on a monthly, quarterly, and annual basis.

The time period for calculating COGS depends on the type of business you run and how you do your accounting.

Likewise, there are different ways to do the COGS calculations, including:

• First in, first out (FIFO)
• Last in, first out (LIFO)
• Average cost
• Special ID method

It’s crucial to have all of this information ready for your accountant — or for a tax professional to help you understand what you need to do if you manage your own books.

COGS calculation formula

For each relevant COGS reporting time period, start with the total value of your beginning inventory (i.e. the materials you already have on-hand) before you make any new purchases. Then, add on the total value of any new materials you purchased over the same time period.

For simplicity, let’s say you want to measure COGS over one month, and your total value for existing inventory is 5,000 units at a cost of $1.00 each. Your beginning inventory is, therefore, worth $5,000.

Next, you buy an additional 5,000 units at the same cost. You now have $10,000 worth of inventory ($5,000 + $5,000) to sell.

Over the course of that month, you sell 7,500 units. At the end of the month, you’re now left with 2,500 units in your inventory (at a cost of $1.00 each = $2,500).

Here’s the formula you’d use to calculate your cost of goods sold for the month:

Beginning inventory = $5,000

• Purchases = $5,000

– Ending inventory = $2,500

________________________

Cost of goods sold = $7,500 for one month

As your business grows, and as you start to measure your cost of goods sold over longer periods, you might use more sophisticated ways to calculate these numbers.

Let’s assume you’re looking at your COGS on a quarterly basis, and the cost to purchase your inventory changes each month. The first month, the cost per unit is $1.00, the second month it goes up to $1.50, and in the third month, it costs $1.25 per unit.

First in, First Out (FIFO) method

This COGS accounting method assumes you’ll sell the inventory worth $1.00 per unit first, before selling items sold in later months. Let’s assume that over the 2nd quarter of 2022, you sell a total of 325 units. In April, you had 100 units left in stock (worth $1.00 each) and you sold all of them.

In May, you purchased an additional 200 units at $1.50 each and sold all of them. Finally, you purchased another 200 in June and sold only 25.

Let’s do the COGS calculation, starting with the cost per unit sold each month.

• April = $1.00 x 100 units = $100
• May = $1.50 x 200 units = $300
• June = $2.00 x 200 units = $400

Your cost per goods sold is, therefore:

$100 (for the existing inventory in April)
+ Purchases in May and June worth $700 ($300 + $400)

– Ending inventory of 175 units (@ $2.00 each) = $350

________________________________

$450 is your quarterly FIFO COGS ($100 + $700 – $350)

Last in, Last Out (LIFO) method

In this scenario, you calculate COGS by using the value of your inventory in the last month of the quarter first.

Some businesses use this method to get a tax break when their cost per unit goes up significantly over a set time period.

Using the numbers illustrated above in the FIFO COGS calculation, you’d use the value of your goods purchased in June as your starting point. Let’s say you sold a total of 300 units in the quarter. You’d take the value of the 200 units sold in June (at $400), add 100 units at the May rate (100 x $1.50 = $150), and calculate your COGS like this:

$400 (for all units bought in June)
+ $400 (for units purchased in April and May)

– $250 (inventory left from April and May = 100 @ $1.50 + 100 @ $1.00)

____________________

$550 is your quarterly LIFO COGS ($400 + $400 – $250)

Keep in mind that using the LIFO method for COGS will eat into your profits. Therefore, you need to weigh the value of reporting losses for tax breaks versus reporting higher revenue, which might raise concerns with your bank when you need financing, or if you have any business investors or shareholders (as your business grows).

Average cost method

This is a simple COGS method that uses the average cost of the inventory purchased over a three-month or annual reporting period in the COGS calculation.

Using the example above, you’d add all three unit prices up and apply the average cost against all units sold during that time period. You may want to start out using the average cost method to manage cash flow, especially if you don’t manufacture your own products.

Special ID method

This COGS method is used when you sell multiple products that vary in manufacturing costs over a set time period. For example, an automobile manufacturer will sell different car models with different product identification numbers. In this instance, it would be wise to work with an accountant to properly calculate your COGS.

What do I need to know about COGS and taxes?

Regardless of whether you calculate your COGS monthly or quarterly, you’ll need to do so during tax season. Your COGS calculations must be completed in Part III (Schedule C) of your small business income tax statement.

You can use the cost of goods sold worksheet on lines 35 to 42 of page two.

This content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. Check the IRS website for up-to-date instructions and requirements.

Let’s take a closer look at each of the line items that go into the COGS calculation.

Line 35: Inventory at the beginning of the year

If you’re an online or physical retailer, and simply re-sell the inventory you purchase from someone else, the amount on this line is the cost of the merchandise you had on hand at the beginning of the year.

It’s different if you manufacture your own products. The amount on this line would be the cost of any items you produced, plus the cost of the supplies you purchased in the reporting tax year and still have on hand to make products you’ll sell in the future.

Note: If there is any difference between the previous year’s ending inventory and this year’s beginning inventory, you will need to explain why.

Line 36: Purchases less cost of items withdrawn for personal use

For re-sellers, the amount you input on this line should be the inventory you bought during the tax year.

If you manufacture your own items to sell, the amount should include the materials and parts you purchased during the year from vendors (including any discounts they gave you).

Always be sure to remove the cost of any items you returned, as well as any items you pulled out of your inventory for your own personal use.

Line 37: Cost of labor (minus your own paid labor)

Your cost of labor consists of three elements:

1. Direct labor: Wages you paid to employees who made the products to be sold.
2. Indirect labor: What you paid to employees who performed general factory functions, such as a foreman, and whose work does not have a direct connection with the making of the product.
3. Other labor: Wages for selling or administrative personnel.

If you run a manufacturing business, the labor costs you input on line 37 for COGS should be relevant to each product produced during the period. A tax account should be able to help you identify which costs to use in your COGS calculation.

Re-sellers won’t likely have many labor costs, and you must not include your own paid labor (as the business owner) in your cost of goods sold.

Line 38: Materials and supplies

The number inputted on this line for COGS should include the cost of the items that are separate from the main materials used in the manufacturing of your product — but are still an important part of producing it.

For example, these materials might include glue or buttons that a fashion retailer sews onto their garments.

Line 39: Other costs

Additional costs can be added to your cost of goods sold, depending on the type of business your run.

Manufacturers can use this line to record any additional costs of creating your product — such as packaging and shipping costs to bring in supplies and materials — as well as the overhead costs for running your factory (but not the costs to sell or distribute products).

Line 40: Cost of goods available for sale

On this line, you should add up the amounts on lines 35 through 39 to get the total cost of goods available for sale.

Line 41: Inventory at end of the year

On this line, you should include the value of the items you have in your inventory that have not yet been sold as of year-end.

Like most businesses, you may need to do a physical inventory count of what you have in stock on December 31, and determine the cost to produce the items in that count.

When placing a value on your end-of-year inventory, be sure to use the cost to produce the items in your COGS calculation and not the price you charged customers for these items.

Now you have everything you need to calculate your cost of goods sold for the tax year. On line 42, subtract the amount on line 41 from line 40. You’ll input this final number on line 4 of page 1 of Schedule C – Cost of Goods Sold.

For additional help when completing your small business taxes, read: How to organize your financial statements to make tax season smooth sailing.

Planning for long-term growth with COGS

Once you calculate your cost of goods sold, you’ll gain a better understanding of your monthly, quarterly, and annual cash flow.

Your COGS calculations can also help you to price your products accordingly, complete your business income taxes, and plan for the long-term growth and success of your small business.

Keep in mind, the above content provides a general explanation, and how you calculate COGS will depend on many factors. For example, manufacturing businesses will have more sophisticated requirements for tracking inventory and calculating the cost of goods sold.

Always consult an accountant or tax professional for specific COGS reporting or tax requirements for your small business.

This article includes content originally published on the GoDaddy Blog by Chris Peden.