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Cost of Goods Sold (“COGS”) and Gross Profit3:48 with Michael Watson
Reviewing the Cost of Goods Sold (“COGS”) and Gross Profit line items, and the typical distinction between Gross Margin and Gross Profit.
All right, in this video, we're gonna talk about the next sections of the P&L, 0:00 cost of goods sold, or COGS, and gross profit. 0:05 Similar to revenue, sometimes what companies call COGS will change. 0:08 We can see that Apple refers to cost of sales. 0:13 Sometimes you'll see cost of revenue or cost of services. 0:17 As we are introducing concepts, don't get hung up on why they are named differently. 0:21 The main thing to internalize is that COGS represents costs that are directly 0:27 associated with the revenue or sales you earned. 0:32 I'll use an example I've given in other courses because it's a great example. 0:36 When we buy a cup of coffee, 0:40 the coffee shop is going to incur some costs specific to that coffee. 0:42 The water and coffee used to brew the contents of our cup, the actual cup that 0:47 the coffee comes in, and any milk we take, etc., those are COGS. 0:52 The salary of the barista, 0:57 the rent of the shop, those are generally not considered COGS because they 0:59 would have happened regardless of whether we sold the coffee or not. 1:04 Often, these costs not directly related to the cup of coffee are referred to as, 1:09 quote, overheads. 1:14 They are usually fixed costs. 1:16 COGS are more likely to be variable costs, but not always. 1:18 So once we subtract our COGS from our revenue, we are left with gross profit. 1:23 Remember how earlier in the course we talked about the difference between gross 1:29 revenue and net revenue? 1:32 Well, here's another application of that. 1:34 Gross profit isn't our profit profit. 1:37 It's our profit before other costs that need to be factored in to get to our 1:39 net profit, which is profit profit. 1:44 I'll elaborate more on that later in this stage. 1:47 Back to gross profit, though. 1:51 So this is basically the first measure of profit that shows up on our P&L. 1:53 Gross profit shows the amount of money we would make 1:58 if we didn't have to do anything other than make the products we sell. 2:01 Of course, there are a whole lot of other costs, like rent, and sales, and so forth. 2:05 So just under gross profit, you'll see gross margin. 2:10 Some people make the mistake of using these terms interchangeably, but 2:14 that's not best practice. 2:18 Gross profit is the nominal value, 2:21 gross margin is your gross profit divided by revenue. 2:23 So when you talk about margins on the P&L, 2:28 it's always about a certain nominal value divided by revenue. 2:31 You'll see more examples of that in later videos. 2:36 Let's talk about this some more, though. 2:39 Can you think of a situation where your gross profit goes up, but 2:41 it's not necessarily good news? 2:45 Go ahead and pause the video and think about it a bit. 2:47 Hi, welcome back. 2:52 So let's say we've doubled our revenue from 100 to 200. 2:54 Our gross profit went from 50 to 60, 2:58 that means our gross profit improved by 20% year-on-year. 3:00 But our revenue increased by 100% year-on-year. 3:05 This means our gross margin declined from 50% to 30%, 3:09 we had gross margin contraction. 3:14 This would be extremely alarming to management. 3:18 Ideally, we would like to see our gross margins staying consistent year in and 3:21 year out, or, better yet, improving. 3:24 Think about the ramifications of this a bit. 3:28 Depending on the product you're creating or the service you're providing, 3:31 commodities can have a major impact on your gross profit and gross margin. 3:35 This is why the price of a barrel of crude oil is such a closely tracked number, 3:39 because it's a major COGS item for several industries. 3:44
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