Understanding the cost of goods sold (COGS) formula is essential for any business that carries inventory. This formula provides a clear understanding of the gross profit margin, which measures total sales minus the cost of goods sold. COGS takes into account all direct costs associated with producing and selling a product, including materials, labor, storage, packaging, and shipping. By subtracting these costs from the total sales of a company, businesses can better understand their overall financial performance. To put it simply: Knowing your cost of goods sold helps you to make more informed decisions so you can maximize profits and build a successful and sustainable business.