Cost of sales

Also called COGS, Cost of goods sold, Direct costs

The costs that only exist because you made the sale. Everything else is an overhead.

What it means

Cost of sales is what it directly cost you to deliver what you sold: the materials, the stock, the subcontractor, the hours of the people who actually did the work.

The test is simple. If you had not made the sale, would the cost still have happened? If no, it is cost of sales. If yes, it is an overhead.

Why it matters

The split between the two is what makes gross margin meaningful, and gross margin is what tells you whether your pricing works.

Get the split wrong and every conclusion downstream is wrong. Filing the delivery driver's wages as an overhead makes each sale look more profitable than it is and makes the business look like it has an overhead problem it does not have.

What it looks like in practice

A print shop's cost of sales is paper, ink, outsourced finishing and the press operator's time. Its overheads are the rent, the accountant, the website, the sales manager's salary and the insurance.

Borderline cases are normal and the rule is consistency: pick a treatment, write it down, and apply it every month, because a figure that means different things in different months is worse than a crude one that means the same thing every time.

What to watch out for

Your own time, if you are the one delivering the work. Left out, the gross margin is fiction. The fix is to cost your hours at what you would have to pay somebody else.

Stock. Cost of sales counts what you sold, not what you bought — the rest is still stock on the balance sheet. Businesses that ignore this see a terrible month every time they restock.

Where to get proper advice

Ask your accountant to agree the cost-of-sales list with you once and to set the chart of accounts up to match it. It is a one-off conversation that improves every report you get afterwards.