A miscalculated COGS could spell disaster for a growing SaaS company. ![]() For those finance teams, working out the SaaS COGS is a whole other ball game.īecause they’re dealing with software and applications, defining the direct costs involved in delivering SaaS products can be tricky: Costs are invariably variable due to the pay-as-you-go cloud computing model, there is little visibility over who is spending what when they’re delivering SaaS products, and it can be difficult for the often disparate and siloed finance teams to understand what counts as an operational cost (and therefore should be removed from the SaaS COGS equation) and what counts as a direct cost (and therefore should be included in the SaaS COGS equation).īut it’s essential that finance teams within SaaS companies get a firm grip over their COGS because it’s used to calculate the company’s gross margin which, in turn, proves the scalability of the business. All the finance team would need to do is take an inventory at the beginning of the financial period, add the direct costs of manufacturing and delivering the tables to this amount (so these costs might include things like materials, labor, packaging, and delivery), take that sum off the inventory they’re left with at the end of the financial period, and hey presto! They have their COGS.īut what about ‘non-conventional’ companies that don't make physical products? I’m talking about those that operate in the Software-as-a-Service (SaaS) space. For conventional businesses that sell physical products, let’s say one that makes tables, working out the COGS is a walk in the park. ![]() This is where your understanding of how to build an accurate COGS (Cost of Goods Sold) for a SaaS business becomes your lifeline.Īs you probably know (but if you don’t, check out this article for a quick summarization), COGS is a financial practice that measures how much it costs a business to manufacture and deliver a product or service to its customers. But what do they mean? You haven't changed anything! They seem to think you’re responsible for reporting on costs and explaining why gross margins are up or down, but you feel unprepared and unable to explain why the margins are different. You try to answer them as best you can, but later on, someone always gets on your case about why the margins have changed. The questions they ask are always overwhelming and confusing. And, the finance team, without fail, will ask you each month for more information about your AWS bill. Tell me if this is familiar: Your company reports its finances monthly. This is a cost that is not included in COGS calculations.
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