How to Track Your Cost of Goods Sold (COGS) for Better Profit Margins

Written By Rafael Simo

For restaurants, food trucks, and small businesses, understanding your Cost of Goods Sold (COGS) is essential to running a profitable operation. COGS includes the direct costs of producing the goods you sell—such as raw ingredients, packaging, and production labor. Accurately tracking these expenses not only helps you understand your profit margins but also allows you to make smarter decisions about pricing, purchasing, and operations. Here’s how to get started:

Step 1: Identify Your COGS Components

The first step in tracking COGS is knowing what expenses to include. Common components are:

  • Raw materials: Ingredients for menu items or products you sell.

  • Packaging: Materials used for serving or storing your goods.

  • Direct labor: Wages for employees directly involved in production.

  • Shipping costs: Expenses for getting inventory to your business.

Step 2: Set Up a Reliable Tracking System

To effectively monitor COGS, you’ll need a system to record and categorize expenses:

  1. Accounting Software: Use tools like QuickBooks or Xero to automate expense tracking.

  2. Spreadsheets: If you’re just starting out, create a detailed spreadsheet to log purchases, quantities, and costs.

  3. Inventory Management Tools: Software like Square for Restaurants or MarketMan can help track inventory usage and costs.

Step 3: Record Purchases and Inventory Changes

Accurate records are crucial for calculating COGS. Implement these practices:

  • Log every purchase: Record the cost, quantity, and vendor for each item.

  • Track inventory levels: Perform regular inventory counts to account for usage and waste.

  • Account for waste and shrinkage: Keep notes on spoilage, overcooking, or theft to avoid inflating your profit margins.

Step 4: Calculate Your COGS Regularly

To determine your COGS for a specific period, use this formula:

COGS = (Beginning Inventory + Purchases) - Ending Inventory

For example, if your starting inventory is $5,000, you purchase $8,000 worth of goods during the month, and your ending inventory is $4,000, your COGS for the month is:

$5,000 + $8,000 - $4,000 = $9,000

Step 5: Analyze and Adjust

Once you have your COGS, compare it to your revenue to calculate your gross profit margin. Use this insight to:

  • Adjust pricing: If your margins are too low, consider raising prices.

  • Refine purchasing: Identify high-cost items and negotiate with vendors for better deals.

  • Control waste: Reduce over-ordering or inefficient preparation methods.

Step 6: Review Monthly

Regular reviews help you identify trends and make proactive changes. Set aside time each month to:

  • Evaluate your COGS trends.

  • Compare performance across different time periods or menu items.

  • Align with your financial goals and strategies.

Conclusion

Tracking COGS is vital for better profit margins and long-term success. At GrowLine Bookkeeping, we’re here to help you simplify the process with expert bookkeeping services tailored to restaurants, food trucks, and small businesses. Contact us today to learn how we can support your financial goals and take the guesswork out of managing your finances.

Rafael Simo
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