The next element is accounting for inventory. Especially if you stock up a lot of items (such as beverages) to take advantage of discount, there may be a lot of inventory left at the end of the month. If you include everything you purchased as cost at the month of purchase, it will give you a higher cost ratio and a lower cost ratio next month (because you don’t purchase the next month and use the items that you have stocked.)

For accounting, cost of goods sold for a certain month is calculated as follows;

*Cost of goods sold = Beginning inventory + purchased during the month – ending inventory

As you can see from this formula, if you don’t take inventory at the end of the month and just use purchased amounts as cost of goods sold, the cost of goods sold for a particular month will be inflated. Taking inventory at the end of the month will give you more accurate picture of your cost structure.

There are several ways to take inventory. You do not always need to take complete inventory for each item to come up with a close-enough inventory so that you can rely on financial statements. This will be a topic by itself.