How to Compute COGS and Gross Profit for Your Small Business

If you sell anything — snacks, load, clothes, or online orders — you need to know if you are actually making money on each sale, not just how much cash came in. Cost of Goods Sold (COGS) and gross profit are the two numbers that tell you the real story behind your sales.

What is COGS?

COGS stands for Cost of Goods Sold. It is the direct cost of the products you sold during a specific period — usually a month. For a sari-sari store, this means how much you paid your suppliers for the goods that left your shelves, not what you paid for goods still sitting there unsold.

COGS only covers the cost of the merchandise itself. It does not include your rent, electricity, delivery fees for your own errands, or your own salary. Those are operating expenses, and they belong in a separate section of your profit and loss statement.

Knowing your COGS matters because it is the first checkpoint in your income statement. Get it wrong, and every number after it — gross profit, net profit, even how much cash you can safely take out of the business — will be wrong too.

The COGS formula

The standard formula for computing COGS is simple:

Beginning Inventory + Purchases − Ending Inventory = COGS

• Beginning inventory — the value of stock you had on hand at the start of the period, at cost (not selling price).
• Purchases — everything you bought or restocked during the period, at cost.
• Ending inventory — the value of stock left unsold at the end of the period, at cost.

This formula works because it isolates only the cost of what actually left your store or was shipped to customers. Whatever you started with, plus whatever you added, minus whatever is still sitting on the shelf, equals what you sold.

How to compute gross profit and gross margin

Once you have COGS, gross profit is straightforward:

Sales − COGS = Gross Profit

Gross profit tells you, in peso terms, how much money is left after covering the cost of the products themselves. It does not yet account for rent, packaging, delivery, or other operating costs.

Gross margin turns that peso amount into a percentage, which makes it easier to compare across months or against other businesses:

(Gross Profit ÷ Sales) x 100 = Gross Margin %

A higher gross margin means you keep more of every peso in sales before operating expenses are deducted. Tracking this monthly, alongside your cash flow, helps you catch pricing problems early — for example, if your margin is shrinking even though sales look steady, your supplier costs may have quietly gone up.

Worked example: a sari-sari store

Let’s walk through a real computation using a small sari-sari store for the month of June.

• Beginning inventory (June 1, at cost): ₱25,000
• Purchases during June (canned goods, snacks, softdrinks, load, etc.): ₱60,000
• Ending inventory (June 30, at cost): ₱20,000
• Total sales for June: ₱95,000

Step 1: Compute COGS.

₱25,000 (beginning inventory) + ₱60,000 (purchases) − ₱20,000 (ending inventory) = ₱65,000 COGS

Step 2: Compute gross profit.

₱95,000 (sales) − ₱65,000 (COGS) = ₱30,000 gross profit

Step 3: Compute gross margin.

₱30,000 ÷ ₱95,000 x 100 = 31.6% gross margin

This means that for every ₱100 in sales, the store owner keeps about ₱31.60 after paying for the goods themselves. The remaining ₱68.40 covers rent, electricity, helper’s wage, spoilage, and whatever is left over becomes actual profit.

The same formula applies whether you run an online reselling page, a small food business, or an ukay-ukay stall. An online seller would replace “beginning inventory” with the cost of stock carried over from the previous month, and “purchases” with new stock bought from suppliers or wholesalers. An ukay-ukay seller would use the cost of bales bought, minus what is still unsold at the end of the month, at estimated cost.

Common mistakes small business owners make

• Using selling price instead of cost. Inventory in the COGS formula must always be valued at what you paid, not what you plan to sell it for.
• Skipping the physical count. Without an actual count of what is left on the shelf or in storage, ending inventory is a guess, and so is your COGS.
• Lumping in operating expenses. Delivery fees for stock coming in can be part of COGS, but delivery fees for sending out customer orders usually belong in operating expenses instead.
• Not tracking it monthly. A one-time COGS check does not tell you much. Doing it every month lets you spot trends, like rising supplier prices eating into your margin.

Why this number matters for your business decisions

Gross margin is one of the clearest signals of whether your pricing is sustainable. If your margin keeps shrinking month over month, it usually means one of three things: your supplier costs went up without a matching price adjustment, you are giving out too many discounts or promos, or you have spoilage and losses that are not being accounted for.

Tracking COGS and gross profit alongside your net worth and overall cash flow gives you a fuller picture of how the business is really doing, not just how much cash is moving in and out. A business can look busy and still be losing money on every sale if the gross margin is too thin.

Frequently asked questions

Is COGS the same as total expenses?

No. COGS only covers the direct cost of the products sold. Total expenses also include operating costs like rent, utilities, wages, packaging, and marketing, which are subtracted separately after gross profit is computed.

What if I do not do a formal inventory count every month?

You can still estimate ending inventory by doing a quick physical count of stock on hand and valuing it at cost. It does not need to be a full audit — even a simple tally of quantities multiplied by unit cost is enough to get a usable COGS figure.

What counts as a healthy gross margin for a small business in the Philippines?

It varies widely by industry. Sari-sari stores and grocery-type businesses often run on thinner margins because of high competition on fast-moving goods, while food businesses and resellers with unique products can often command higher margins. The more useful benchmark is your own trend — whether your margin is improving, stable, or declining month over month.