lightworker0000
New member
This is not directly EIDL/PPP related but I wanted to at least provide some useful information for folks. I've seen some bizarre ratios for Rev/COGS which leads me to believe that people don't fully understand how to calculate it. I also was not sure intending for this to be tax based definitions but rather actionable ones used up view business health.
COGS or Cost of Goods Sold is an accounting term defined as the direct cost of producing goods. Essentially, COGS should scale with revenue proportionally. The more units you sell, the more COGS will be required. Yes there are economies of scale here but I'm ignoring that for smaller businesses.
Goods are a little more straight forward at the beginning:
A Widget sells for X and the cost of the widget is Y. Y is your COGS for the Widget. Administration costs, management, overhead, rent, storage costs, lawyers, ads are all considered OpEx as they are not direct costs of the Widget.
Now lets say you are a manufacturer that uses labor to put things together:
A Widget sells for X and the materials for the Widget cost Y and the LABOR for the widget costs Z. In this case, both Y and Z are directly related to producing the Widget so both are considered COGS. Again, OpEx is still the other stuff.
Lastly, and the one that seems to have the most confusion is a service company. Say you run a creative agency, or a pool cleaning company, or a landscape mowing company. There won't be a large amount of materials involved in these businesses. They are service based businesses. They do however have a high percentage of labor. This type of labor should also scale pretty linearly: the more pools you have to clean, the more people you need.
For a service model:
A pool cleaning sells for X, materials for the pool cleaning are Y (lets say $0 in this case) and the cost of labor is Z. In this case, Y ($0) and Z are considered COGS as the labor is directly related to producing what you are selling. This counts for service AND products which are ultimately the same thing.
Edit: If you are pure service company and an exclusion, you won't have COGS according to your taxes. The equivalent would be Cost of Sales/Service/Revenue. Why the EIDL used COGS instead of gross margin I do not know.
There can be some vagueness in determining if some roles in a company are direct vs. indirect. In my company I do some design (revenue producing) and some management (indirect, OpEx). Generally we follow the rule of if more than half of the person's time is spent producing revenue, count them as COGS rather than OpEx. Regardless, COGS is a very good term to understand if you are a sole prop dropshipper or a 40 person service company. Accounting is not just something for taxes and your CPA: it can help guide your company through very tough times such as these. Understanding how to communicate with accountants, banks, investors etc. has been critical for me in the last 2-3 years and growing more so.
Good luck to everyone! Stay safe.
EDIT: Because it needs to be said. I am NOT an accountant. More importantly, I am not YOUR accountant. If your accountant said use $0 go for it. I'm in the design and construction spaces and drafting time counts as COGS according to my CPA even though it isn't a good. If I had that option I would likely argue the point as well to maximize the loan.
COGS or Cost of Goods Sold is an accounting term defined as the direct cost of producing goods. Essentially, COGS should scale with revenue proportionally. The more units you sell, the more COGS will be required. Yes there are economies of scale here but I'm ignoring that for smaller businesses.
Goods are a little more straight forward at the beginning:
A Widget sells for X and the cost of the widget is Y. Y is your COGS for the Widget. Administration costs, management, overhead, rent, storage costs, lawyers, ads are all considered OpEx as they are not direct costs of the Widget.
Now lets say you are a manufacturer that uses labor to put things together:
A Widget sells for X and the materials for the Widget cost Y and the LABOR for the widget costs Z. In this case, both Y and Z are directly related to producing the Widget so both are considered COGS. Again, OpEx is still the other stuff.
Lastly, and the one that seems to have the most confusion is a service company. Say you run a creative agency, or a pool cleaning company, or a landscape mowing company. There won't be a large amount of materials involved in these businesses. They are service based businesses. They do however have a high percentage of labor. This type of labor should also scale pretty linearly: the more pools you have to clean, the more people you need.
For a service model:
A pool cleaning sells for X, materials for the pool cleaning are Y (lets say $0 in this case) and the cost of labor is Z. In this case, Y ($0) and Z are considered COGS as the labor is directly related to producing what you are selling. This counts for service AND products which are ultimately the same thing.
Edit: If you are pure service company and an exclusion, you won't have COGS according to your taxes. The equivalent would be Cost of Sales/Service/Revenue. Why the EIDL used COGS instead of gross margin I do not know.
There can be some vagueness in determining if some roles in a company are direct vs. indirect. In my company I do some design (revenue producing) and some management (indirect, OpEx). Generally we follow the rule of if more than half of the person's time is spent producing revenue, count them as COGS rather than OpEx. Regardless, COGS is a very good term to understand if you are a sole prop dropshipper or a 40 person service company. Accounting is not just something for taxes and your CPA: it can help guide your company through very tough times such as these. Understanding how to communicate with accountants, banks, investors etc. has been critical for me in the last 2-3 years and growing more so.
Good luck to everyone! Stay safe.
EDIT: Because it needs to be said. I am NOT an accountant. More importantly, I am not YOUR accountant. If your accountant said use $0 go for it. I'm in the design and construction spaces and drafting time counts as COGS according to my CPA even though it isn't a good. If I had that option I would likely argue the point as well to maximize the loan.