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COGS vs Opex vs Other Expenses

COGS vs Opex vs Other Expenses

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They are each expenses found on your P&L

But each section mean's something else

Let’s start from top of your P&L to the bottom

➡️ What does it mean?

Cost of Goods Sold are the direct costs in delivering your products / services

They are necessary costs in order to recognize revenue - without them, you wouldn’t be able to delivery our products / services to customers

➡️ What are some examples?

This can vary depending on the industry…

Common ones for manufacturing companies → Direct Materials, Manufacturing Overhead, Direct Labor

Common ones for SaaS companies → Web hosting & servers, Customer support

➡️ What are some things to watch out for?

COGS affect your gross profit, which is a very important metric for your business

The lower you can get this number, the higher your margins, and the more money you can spend on other areas of the business

Be careful not to classify things related to the development of your product / service in cogs - those are an operating expense, or should be capitalized on your balance sheet!

2️⃣ Operating Expenses (Opex)

➡️ What does it mean?

The indirect costs incurred in running a business

➡️ What are some examples?

Rent, Payroll, Advertising & marketing, Professional fees

➡️ What are some things to watch out for?

Your operating expenses are most often where the bulk of your expenses on the P&L will lie

The largest opex account is often times payroll, and it can be difficult to easily quickly adjust this number, given the sensitivity around HR

3️⃣ Other Expenses

➡️ What does it mean?

These are expenses that aren’t related to carrying out your product or service, nor are they related to your core business

➡️ What are some examples?

Depreciation, Interest Expense, one time settlements for lawsuits

➡️ What are some things to watch out for?

This section can have large swings in balances between one period to another…

since they are expenses that don’t directly relate to selling your product / service, or to your core business

Some companies also treat Depreciation as a Cost of Goods Sold, specifically if they utilize Machinery & Equipment in carrying out their product or service

That’s my take on COGS vs Opex vs Other Expense


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