What is the Difference Between COGS vs. Operating Expenses | Small Business Tax Writeoff
This may or may not be common sense but if your business isn’t profitable, it’s not going to end well. Easy for me to say, sitting over here in my accountant throne but in this kingdom, we’re all about profit, people.
Profit for the people. How’s that for a new tag line?
But fo real, let’s talk about understanding your expenses and making sure that you’re in the green when you are running the numbers at the end of the day.
First things first (I’m a realest) - what’s an ‘expense’ anyway? Expenses are your costs of doing business. This is the money you need to spend in order to generate income and operate your business. But, not all expenses are created equal so let me break down the two major types of expenses for you.
COGS
AKA: cost of goods or services, also known as direct costs. These are expenses directly related to making your product or providing your service. For example, shipping is a cost of goods or services. You’ll have to pay for shipping to send your product to the customer to complete the sale.
OPERATING EXPENSES
AKA: overhead costs, is the money spent on running your business. An example of this is business insurance. You’re required to pay your premiums regardless of how many sales you have.
Another example is your office or storefront rent because you have to pay the same amount whether you have one customer that month or 100.
Sounds simple on paper, but sometimes it can get confusing IRL. The easiest way to differentiate COGS vs Operating Costs is to ask yourself: Would I have this expense even if I don’t sell anything? If the answer is yes, then you’re dealing with an operating expense.
Kristine, why should we care?
COGS tells us how efficient we are at creating our product or service, while operating expenses tell us how efficient we are at running our overall business.
Both metrics provide incredible insight into your business and can make or break your profitability, so it’s super important that we know the difference as business owners.
I know that jumping into understanding your business efficiency and profitability can be overwhelming, but now is the perfect time to get to the bottom of it and set up your business for success.
My signature course, Bookkeeping Bootcamp, will help you better understand your finances so you can make informed decisions that are best for you and your biz.