Running a small business, especially one birthed out of passion, can be exciting! The thing though is that if you are not on top of your finances, pretty soon, you can discover that it takes more than passion to keep the business running. You can start wondering why the business doesn’t seem to be making money in spite of all the time you are putting into it.

Keeping track of your finances is the first step to solving this problem. However, starting out, it can feel overwhelming. To help you get started, I created a Google Sheet you can use. Check out my YouTube video here where I walk you through it.

When you start tracking your finances, one term you might encounter is “Cost of Sales” (COS). While the term might seem complex, worry not! Let me break it down and also share some real-life examples to show how it helps you understand your business’s true profit.

Imagine you run a business:

For a product-based business, like say a bakery selling cookies or a business that sells T-shirts:

For a service-based business, like say a digital marketing agency:

Cost of Sales (COS) is simply the cost of those supplies you used to directly create what you sell. Think of it like subtracting the “making” cost from your income to see how much profit you actually make from selling.

Why is COS important?

Let’s get into some examples to bring this home.

Product-Based Business Examples:

Service-Based Business Examples:

The key is to identify the direct costs directly tied to what you sell, whether it’s a product or a service.

A key thing to note is that you need to differentiate COS from business expenses. While it might sometimes be tricky to make the distinction, especially for service-based businesses, let’s see how to do it.

COS vs. Expenses: Don’t Get Confused!

So, Should You Track COS Right Away?

If you are still confused, take heart. It’s completely okay to focus on basic income and expense tracking initially, especially if you’re new to bookkeeping. The “Transactions” sheet in the Google Sheet I shared will help you with that perfectly!

However, if you’re curious about diving deeper and understanding your profit margins better, tracking COS can be a valuable tool.

Need Help Implementing COS in Your Business?

While this article provides a basic understanding, implementing COS effectively can involve specific considerations for your industry. If you’d like personalized guidance on incorporating COS into your bookkeeping system and maximizing its benefits, our team of experienced accountants is here to help! Schedule a 30-minute consultation to discuss your specific needs here

Remember: Understanding the basic concept of COS will give you a head start in managing your business finances effectively!

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