Cost of Goods Sold

What is Cost of Goods Sold?

Cost of goods sold (COGS) represents the direct costs attributable to producing the goods a company sells during a period. It includes raw materials, direct labor, and manufacturing overhead directly tied to production.

COGS is the first deduction from revenue to calculate gross margin. If revenue is $500K and COGS is $310K, gross margin is $190K or 38%. Gross margin must cover operating expenses, and what remains contributes to net profitability and cash generation.

For manufacturers, COGS timing matters as much as COGS magnitude. Materials purchased in March become COGS when products sell in May. The cash left your account in March. The revenue arrives in May or later. This timing gap between COGS cash outflow and revenue cash inflow defines the manufacturing cash challenge. COGS relates to gross margin and the existing COGS entry for service businesses. Cash-aware operators track when COGS cash leaves, not just when it is recognized on the P&L.

Why it matters

Tracking COGS as an accrual accounting figure without connecting it to cash timing creates a misleading profitability picture. COGS cash leaves before revenue cash arrives.

Formula

Gross Margin = Revenue - COGS

Example

How RunwayCal helps

Common mistakes

• 1Confusing COGS timing with revenue timing in cash planning
• 2Not separating variable COGS from fixed production costs
• 3Using COGS percentages from accounting without adjusting for cash conversion cycle