To reform your business model and reduce sales (accounting) expenses in your processes, you must know the elements of cost of sales, how cost of sales is recorded and its relationship to your profit margins, as well as understand what an expense is and the types of cost systems. This will allow you to adjust your internal budgets.
In this article we explain everything you as a sales manager need to know about what a cost of sales is, its breakdown, use, how the cost of sales is determined with cost allocation formulas, what sales expenses are (accounting), what key sales expenses are, what expenses are in accounting and their importance in keeping a business afloat in times of crisis.
In this sense, we will use as an example the crisis unleashed in recent years from the COVID-19 pandemic. However, you will learn concepts that are useful in any challenging context and the advantages and disadvantages of cost accounting.
What is cost of sales and how do we calculate it?
If you are wondering how cost of sales is calculated, you should keep in mind that cost of sales is the cost of acquisition of the goods sold or the cost of production of the goods sold for a company. This calculation also includes the concept of expense in accounting and can use target cost accounting and the cost of goods sold statement to establish specific associated cost goals that help cover all relevant financial elements, including aspects such as purchase returns that affect the final cost. The determination of cost of sales is calculated by periods.
In cost of sales, clear examples of financial costs are the sales expenses that are included in the sales price of your products or services; some are: the purchase of raw materials and technology, the payment of salaries, freight, the provision of the service, etc.
To define an appropriate monetary value for your product or service, one fundamental thing you must do is calculate the price of a product and the analysis of the sale and purchase price. The cost of the product is key to compete and allows you to know what the utility of a product is, how to calculate the utility of a product or the percentage of utility of a product or service that you can obtain.
In other words, the difference between cost and sale price is that overseas chinese in europe data the cost of sales offers a perspective of what it costs you to produce or acquire a product, while the sale price is the value at which you offer that product to the customer, including your profit margins. To establish this value, it is essential to calculate the sale price with margin to ensure that the price covers direct costs and generates a profit. For this, you must use a formula to obtain the cost of sales in accounting.
Cost of sales and MRR
Knowing the cost of your product helps define your monthly recurring revenue, or MRR. This is the revenue you receive each month. In many industries, this is equivalent to subscription payments.
In fact, many established startups and brands use MMR as their main source of revenue generation. To make it stable, they put permanence conditions on subscriptions, which results in a positive cost of sale in the income statement. An example is companies like Netflix, online media, gyms, etc.
In the B2B sector , another effective strategy for customer retention is to offer a large initial discount. Establishing what an optimal selling price means allows you to beat the prices of your competitors. This way, we can understand what happens to our purchases when prices decrease and what the average cost is. In this way, the cost of acquiring the customer is offset by the expense that is incurred in the long term. The key to making this example pricing strategy work is to identify customers with a high lifetime value.
