Cost of goods sold, or COGS, is the direct cost of producing the products or services you sold in a period. It covers materials, production labor and shipping. It excludes rent, office salaries and marketing. The test is simple: if the cost disappears when you sell nothing, it belongs in COGS.
An example. If you sell a chair for 200 euros and the wood and assembly cost 80 euros, your COGS is 80 euros.
COGS decides how much money is left from each sale before you pay a single fixed cost. For a physical product it usually contains materials, packaging, production labor and inbound shipping. For software it is narrower: hosting, payment fees and support that grows with the number of users. For a service business it is mostly the hours of the people who deliver the work.
Worked example for an online shop. You sell a lamp for 120 euros. The lamp costs you 45 euros from the supplier, 6 euros for packaging and 9 euros for shipping. COGS is 60 euros, so gross profit per lamp is 60 euros. Sell 500 lamps a month and you generate 30,000 euros of gross profit to cover rent, salaries and ads.
The most common mistake is putting everything into COGS. Your office rent, your accountant, your ad budget and your own founder salary are operating expenses, not COGS. Move them into COGS and your margin looks terrible, which can lead you to abandon a product when the real problem is fixed cost.
The second mistake is timing. COGS belongs to the period in which you sold the goods, not the period in which you bought them. If you buy 1,000 lamps in January and sell 200 in February, only 200 lamps worth of cost, 12,000 euros, hits February. The rest stays in inventory.
The financial plan Foundor generates lists COGS as its own line, so you can read gross profit before fixed costs.
