From stock to sold
How to work out what you sold actually cost you
Most SA small businesses look at their bank account and their sales total and conclude they had a good month. They’re missing the line that actually determines whether the business makes money: what did the stuff I sold cost me to put on the shelf? That line is COGS, and without it gross profit is a guess.
The formula
COGS = Opening Inventory + Purchases + Carriage In + Direct Labour − Closing Inventory
The intuition: everything you started with, plus everything you added, minus what’s still there. The leftover is what walked out the door as sales. This works whether you sell phones, freight, food, or furniture — the line items shift but the identity holds.
What counts as stock cost
SA GAAP and IFRS are explicit: inventory cost includes everything needed to bring the goods to their present location and condition. That means:
- Purchase price — ex-supplier, before discounts. Trade and settlement discounts net off.
- Carriage in — freight, sea/air shipping, insurance, customs duties, clearing fees on imports.
- Direct conversion — for manufacturers, the factory-floor labour and directly attributable production overhead.
- Storage — only if necessary to bring goods to a saleable state (e.g. wine ageing). Routine warehousing is operating expense.
What does not go into COGS: outbound freight to customers, sales commissions, admin salaries, marketing, office rent. Those sit below the gross-profit line.
Why gross margin matters more than revenue
R1m of revenue at 50% gross margin produces R500k of gross profit. R1m of revenue at 20% gross margin produces R200k. Same top line — 2.5× the cash to pay overheads, rent, salaries, and own the business. Margin is the lever, not volume. SA SMEs that chase top-line growth without watching margin frequently find themselves bigger and broke at the same time.
The most important number isn’t this month’s gross margin in isolation — it’s the trend. Margin compressing month-on-month means suppliers are raising prices faster than you’re passing them on, the Rand is weakening on imports, theft is creeping up, or your sales mix is shifting to lower-margin lines. Each cause has a different fix; ignoring the trend has the same outcome regardless.
Inventory turnover — the cash-efficiency lens
COGS ÷ Average Inventory tells you how many times the average stock holding turned over during the period. It’s the working-capital equivalent of margin: higher turnover means less cash tied up in stock to produce the same sales.
- Grocery and FMCG: 15–30× a year — fast-moving, perishable.
- General retail: 5–10× a year — depending on category.
- Furniture and homewares: 3–5× a year — slower-moving, bigger ticket.
- Luxury or specialist: 1–2× a year — patient stock, higher margin.
Falling turnover is the canary. Stock that doesn’t move ties up cash, occupies shelf space, ages out, and eventually gets discounted or written off. The earlier you catch the slow-down, the cheaper it is to fix.
The monthly stock-take problem
The maths is mechanical, but the inputs are only as good as your closing inventory number. SA SMEs that stock-take once a year produce annual COGS that’s accurate and monthly COGS that’s useless. By the time the annual stock-take reveals a R200k variance, the damage is done and the cause is buried in twelve months of activity.
Three practical rules:
- Monthly stock-take — even a rough one. Spot-check fast-movers and high-value lines every month, full count quarterly.
- Same valuation method — pick FIFO, weighted average, or specific identification and stick with it. Switching mid-year breaks comparability.
- Reconcile to GL— stock-take totals should tie to the inventory account in your books. Material differences usually mean shrinkage that hasn’t been recognised.
When COGS exceeds revenue
The calculator flags this case. You’re selling below cost — every additional unit deepens the loss. Common causes, in order of frequency:
- Pricing error — someone set prices off an old supplier list, missed a price increase, or forgot to factor in freight.
- Currency move — imports were priced when the Rand was R17/USD and you kept selling at the same Rand price when it moved to R19/USD.
- Closing-stock misvaluation — the most common cause of strange one-off COGS spikes. Recount before you draw conclusions.
- Theft or write-offs — if reconciled stock is genuinely missing, that’s a real loss flowing through COGS.
Negative gross profit is a stop-everything signal — not a growth problem.