Advice and answers from the Slidebean Team
When building a startup or managing finances for a growing company, understanding your costs is essential. Among the most critical metrics is COGS (Cost of Goods Sold). It’s not only a basic accounting concept but also a powerful tool to assess profitability, make informed pricing decisions, and project future growth.
In this article, we'll break down COGS meaning, how to calculate COGS, and why it matters for startup founders and financial analysts alike.
COGS, or Cost of Goods Sold, refers to the direct costs associated with producing the products or services that your business offers. This includes materials, direct labor, and any other costs directly related to delivering your product or service.
For example:
💡 Why It Matters: Software companies tend to have high gross margins because their primary cost—server infrastructure—is relatively low compared to revenue. This often results in gross margins of 70% to 80% .
Understanding how to calculate COGS is essential for accurate financial modeling. Here’s the basic formula:
Each component of this formula deserves attention:
In our Slidebean Financial Model Template, COGS is color-coded as magenta, with all references to this sheet also in magenta. This ensures clarity and consistency throughout the model .
In our Financial Model Template, we’ve predefined three categories for COGS:
These categories are placeholders, and you can rename or adjust them according to your specific business needs. If you rename them, the changes will be reflected throughout your financial model .
Handling VAT (Value Added Tax) can be complex, but our financial model simplifies it. You can input a VAT rate in the Settings Sheet, and the model will automatically separate the tax portion from the actual cost.
For instance, if your country requires a 13% VAT, a total expense of $1,000 would be divided as:
This is especially useful if the VAT is deductible in your country, allowing you to offset the VAT you collect from customers.
Understanding gross profit margin is fundamental for startups. It’s calculated by comparing revenue to COGS.
Gross profit margin tells you how profitable your core operations are before accounting for overhead or operational expenses. This is a key metric for financial analysts and startup founders trying to assess business viability.
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