Knowing the Cost of Goods Sold (COGS) is critical to determining profit. Next to labor, COGS -- the total of all purchases during the year -- is usually the second largest expense for remodelers.
But to get the correct purchases amount, you must add the value of starting inventory and subtract the value of ending inventory. Say you purchased 10 special-order windows for $300 each. When the customer decides she doesn't want them, you can't return them, so you place them in inventory. If you think the windows can be reused, value them at the original $3,000, less if you think you can sell them at a discount. Value a custom-made item that can't be sold at the value of any reusable parts.
Some business owners determine the value of the ending inventory to create an "inventory cushion" for a better bottom line. They create an inflated valuation of ending inventory, which is then subtracted from COGS, creating more "paper" profit. This is a practice I do not encourage. --Howard Scott is a business writer and small business tax preparer in Pembroke, Mass.