What is Cost of Goods Sold (COGS)?
Nexa Consultancy | Startup & Finance Glossary
Cost of Goods Sold (COGS) represents the direct costs attributable to the production of the goods sold by a company. It includes the cost of the raw materials and the direct labor costs used to create the good. It excludes indirect expenses like distribution costs and sales force costs.
For Startups: Understanding COGS is crucial for calculating gross profit and gross margin, which are key indicators of a startup's core profitability and production efficiency. For a D2C or manufacturing startup, accurate COGS calculation is essential for setting prices that ensure each sale is profitable. For a pure SaaS business, COGS is often low and may be referred to as "Cost of Revenue."
Example: For a D2C company selling a shirt, the COGS includes the cost of the fabric, thread, and the wages of the worker who stitched the shirt.