What is Cost of Goods Sold (COGS)?
The direct cost of delivering what you sell - and the line that sets your gross margin.
Cost of Goods Sold (COGS): definition
COGS captures the costs that vary with what you actually sell, as opposed to fixed operating expenses like rent or admin salaries. Subtracting COGS from revenue yields gross profit, and dividing gross profit by revenue yields gross margin - the single most-watched efficiency metric for most businesses.
COGS (periodic)
COGS = Beginning inventory + Purchases − Ending inventory
For services/SaaS, COGS is the direct cost of delivery (hosting, support, direct labor) rather than physical inventory.
How Fintra handles it
Fintra separates direct costs (COGS) from operating expenses in the chart of accounts, so gross margin is correct without manual reclassification. Inventory purchases flow to COGS as items are sold; for services and SaaS, direct delivery costs map to COGS automatically. Margin by product, customer, or job is available because the costs are tagged at the source.
Worked example
Frequently asked questions
What is included in COGS?
Direct costs of what you sold: raw materials, direct labor, freight-in, and directly attributable production or delivery costs. For SaaS, it typically includes hosting, third-party APIs, and customer support tied to delivery. It excludes indirect operating costs like sales, marketing, and admin.
What is the difference between COGS and operating expenses?
COGS is the direct cost of producing what you sold and drives gross margin. Operating expenses (OpEx) - rent, marketing, G&A - are the costs of running the business regardless of any single sale, and sit below gross profit on the income statement.
How does COGS affect gross margin?
Gross margin is (Revenue − COGS) ÷ Revenue. Lower COGS relative to revenue means higher margin. Tracking COGS accurately by product or customer is how you know which lines are actually profitable - Fintra tags costs so you can see margin at that granularity.
Do service businesses have COGS?
Yes - often called cost of revenue or cost of sales. It captures the direct cost of delivering the service (direct labor, hosting, subcontractors). Fintra maps these to COGS so service and SaaS businesses see a real gross margin, not just revenue minus everything.
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