Cost of Goods Sold (COGS)

The Cost of Goods sold refers to the total direct costs a company incurs to produce the goods it sells, including the cost of raw materials and labor directly used to create the product.

Let’s say that we make and sell flowers and we have the below expenses:

• Sales Salaries
• Accounting Salaries

Flower Raw Materials - Seeds, dirt, etc.

Flower Planters - Those who plant the raw materials

Legal Costs

The only expenses included in COGS here are the Flower Raw Materials & Flower Planters. You might think the Sales Salaries should be included, but COGS only includes the actual cost to be able to get the product to the customer. Sales Salaries help bring in the customers, but they fall into Operating Expenses instead of COGS since they’re not a component that physically gets the product in the customer’s hands.

Investors care a lot about Gross Margin & COGS because they can’t be modified. So, if you have 50% Gross Margin (Revenue - COGS), then the other 50% of the business you can theoretically work with. It’s much more difficult to decrease COGS than OpEx.