An Introduction to Costs and Expenses

Understanding where your company spends money is crucial for financial clarity. Two major categories for these expenditures are the Cost of Goods Sold (COGS) and Selling, General & Administrative (SG&A) expenses. Accurately tracking these helps paint a clear picture of your company's profitability and operational efficiency.

COGS vs. SG&A: What’s the Big Difference?

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It's important to distinguish between these two types of costs:

• COGS (Cost of Goods Sold): These are the direct costs specifically tied to creating and delivering your product or service.
  • For businesses selling physical products, this includes expenses like raw materials and direct labor involved in production.
  • For SaaS companies (like the "Sample Revenue Line - SaaS" example in your model), COGS would include costs such as server hosting for active users, third-party API fees directly related to service delivery, or payment processing fees for subscriptions.
  • Essentially, if you don't sell anything, your COGS should ideally be zero or significantly lower, as these costs scale directly with sales volume.
• SG&A (Selling, General & Administrative Expenses): These are your operating expenses, often referred to as OPEX. They represent what it costs to run the business, regardless of whether you made a specific sale on a given day. This broad category includes:
  • Salaries for management, marketing, finance, and administrative teams (as detailed in your SG&A > Staff sheet).
  • Rent for your office space.
  • Software subscriptions for internal tools (e.g., CRM, accounting software).
  • Legal and professional fees.
  • Marketing campaign budgets and other sales-related expenses not directly tied to per-unit production.

Why COGS is Crucial for Gross Profit

COGS plays a direct and critical role in determining your Gross Profit. The calculation is straightforward:

Gross Profit = Total Revenue - COGS

Therefore, the lower your COGS for each unit sold or service delivered, the higher your gross profit margin will be. This margin is vital because it indicates how much money is left over from your sales revenue to cover all your SG&A (operational) expenses and, ideally, to achieve a net profit.

Monitoring your COGS helps you:

• Price your products or services effectively.
• Manage production or service delivery costs efficiently.
• Understand the true profitability of your core offerings.

The work you do through selling and marketing drives revenue. As revenue increases, any costs directly associated with producing that revenue (your COGS) will typically increase proportionally.

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The COGS and SG&A Sheets in Your Model

Your financial model includes dedicated sheets to manage these expenses: the COGS sheet and the SG&A sheet.

The COGS Sheet: This sheet is where you'll itemize all the direct costs associated with your revenue streams. You might find or create categories such as:

• Server/Infrastructure Costs (especially for SaaS)
• Payment Processing Fees
• Direct Material Costs
• Direct Labor
• Customer Support costs directly tied to service delivery (e.g., onboarding for new paying customers).

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The SG&A Sheet:This sheet details all your operational overhead. As mentioned, staff costs from the SG&A > Staff sheet will feed into this section. Other typical SG&A categories you'll manage here include:

• Marketing & Growth (e.g., advertising spend, content creation)
• Professional Services (e.g., legal, accounting, consulting)
• Rent & Utilities
• Software & Subscriptions (for internal operations)
• Tech Support & Services (internal IT)

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Customizing Your Expense Categories

While we've set up standard categories in both the COGS and SG&A sheets to get you started, every business has unique needs. If you find that you need to rename these primary categories to better reflect your specific operational expenses:

1. Navigate to the Assumptions sheet in your financial model.
2. Look for the sections dedicated to COGS and SG&A category names.
3. Adjust the names in the designated cells on the Assumptions sheet. These changes will then reflect across your COGS and SG&A sheets, making the model speak your business's language.

Most of the individual cost and expense lines within these categories will have placeholder spaces for you to input your specific expense figures.

Throughout the COGS and SG&A sheets (and other input sheets in the model), you'll notice that cells requiring your input are formatted with blue text. This visual cue indicates that these are input cells meant for you to change and populate with your company's data.

Using the "Key Indicators" Section

At the top of both the COGS and SG&A sheets, you'll often find a "Key Indicators" section. This area is flexible and open for you to use as needed. You can leverage it to track non-financial metrics or Key Performance Indicators (KPIs) that might influence your financial projections or provide context to your spending.

For example, you could track:

• Active User Count
• Website Traffic
• Number of New Leads
• Customer Acquisition Cost (CAC)
• Any other KPIs relevant to understanding the drivers of your costs.

Inputting these indicators can help you build more dynamic formulas for your costs or simply keep relevant operational data alongside your financial data for better insights.

To summarize, COGS represents your direct costs of selling and directly impacts your gross profit, while SG&A covers your essential operating costs. Both are crucial for a comprehensive understanding of your company's financial health. Your financial model is structured to help you input, track, and manage these expenses effectively for accurate planning and analysis.

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