Entering cost of sales or direct costs

The Cost of Sales or Cost of Goods Sold (COGS) refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the goods. It excludes indirect expenses, such as distribution costs and sales force costs. To deliver your product or service to your customers, you'll incur some necessary costs. If you manufacture your product, for example, you'll have to spend money on raw materials and labor. If you're a retailer, you'll likely have to spend money buying products wholesale. If you're a restaurant, you'll have to spend money on raw ingredients and servers.

Service-based businesses often have fewer direct costs than product-based businesses, but they can still have costs that are directly connected to generating revenue.

If you're not sure whether a cost is a Cost of Sales, here's a good rule of thumb: if you want to know if an expense falls under COGS, ask: "Would this expense have been an expense even if no sales were generated?" Meaning if you sold no product at all this month, would you still have this cost to pay? If the answer to that question is no, then the cost is most likely a cost of sales.

To learn more about the difference between Cost of Sales and operating expenses, see What is the difference between the cost of sales and expenses?.

Upmetrics allows you to forecast Cost of Sales using General Costs, Revenue-specific Costs, and Direct Personnel Costs (Direct Labor).

You can describe your direct costs and let Finance AI create a starting point for your Cost of Sales forecast, or you can create the cost groups and items manually.

Why is the Cost of Sales important?

If your Cost of Sales increases without a corresponding increase in revenue, your gross profit decreases. Monitoring these costs can help you identify opportunities to negotiate with suppliers, improve production efficiency, or reduce other direct costs.

Separating Cost of Sales from your other expenses also helps you understand your gross margin. This is calculated as:

Gross Margin = Revenue – Cost of Sales

Gross margin helps you understand how efficiently your business delivers its products or services and how much revenue remains available to cover operating expenses.

Creating Cost of Sales with Finance AI

1

Go to the Finance Forecasting module, select the Forecast tab, and open the Cost of Sales section.

The guided setup allows you to describe the direct costs involved in producing or delivering your products and services.

2

Describe your Cost of Sales in plain text. Include costs such as raw materials, packaging, production supplies, direct service costs, or other expenses directly associated with generating revenue.

If a cost applies to a particular revenue stream, mention the revenue stream in your description. Then click on Draft my costs option.

TIP: Include the cost name, expected amount, frequency, and the related revenue stream where applicable. This helps Finance AI create a more relevant starting point.

3

The AI will create suggested Cost of Sales groups and items based on the information you entered.

Review the suggested costs, forecasting methods, amounts, and any revenue-stream associations. Use the Edit option to update an item before adding it if required.

Once the suggestions look correct, keep the required items selected and add them to your forecast.

NOTE: Finance AI provides a starting point. Review the suggested amounts, forecasting methods, and revenue relationships to make sure they match your actual business expectations.

4

The selected Cost of Sales groups and items will be added to your forecast.

You can review each cost and update its assumptions whenever required.

Entering General Costs Manually

1

If you do not want Finance AI to draft your Cost of Sales, click I'd rather set it up myself from the initial Cost of Sales setup screen.

2

Enter the Cost of Sales group name and add at least one cost item within that group.

Add additional cost items or groups if required. When you're ready, click Create these.

3

Upmetrics will create the Cost of Sales group and items in your forecast.

Locate the cost you want to configure, click its three-dot menu, and select Edit.

The Cost of Sales assumption form will open.

4

Enter the cost name and select the forecasting method that best matches the cost:

• Constant Amount: Use this when the Cost of Sales remains the same for each selected period.
• Per Unit: Use this when the cost changes according to the number of units sold.
• Per Employee: Use this when the cost depends on your number of employees.
• % of Overall Revenue: Use this when the cost is calculated as a percentage of your overall revenue or another applicable revenue amount.
• % of Other Cost of Sales: Use this when the cost is calculated as a percentage of another Cost of Sales item.
• One-time or Varying Amount Over Time: Use this when the cost occurs once or changes across different forecast periods.

5

Complete the required assumptions for the forecasting method you selected and click Save.

Upmetrics will calculate the Cost of Sales forecast based on the assumptions you entered.

Entering Costs for a Specific Revenue Stream Manually

Use revenue-specific Cost of Sales when a direct cost can be linked to a particular revenue stream.

NOTE: A Cost of Sales item linked to a specific revenue stream is calculated using that selected revenue stream.

1

Create the Cost of Sales group and item using the manual setup process described above.

Once the item is created, open its three-dot menu and select Edit to open the assumption form.

2

Select the forecasting method that best matches the cost and link it to the applicable revenue stream where required.

• Constant Amount: Use this when the cost remains constant during the selected periods.
• Per Unit Sales: Use this when the cost is directly associated with the number of units, services, or customers forecast in the related revenue stream.
• Per Employee: Use this when the cost depends on the number of employees.
• % of Revenue: Use this when the cost is calculated as a percentage of the selected revenue stream.
• One-time or Varying Amount Over Time: Use this when the cost occurs once or changes across forecast periods.

3

Enter the applicable cost amount, percentage, or other assumptions required by the selected forecasting method.

Review the details and click Save.

After saving, review the calculated values in the forecast sheet.

TIP: Direct personnel costs, such as factory workers or restaurant servers whose wages are directly connected to delivering your products or services, can be entered as Direct Labor from the Personnel section.

Editing or Deleting a Cost of Sales

1

To update a Cost of Sales item, click its three-dot menu and select Edit. The assumption form will open so you can update the forecasting method or other details.

2

To remove a Cost of Sales item, open its three-dot menu and select Delete.

TIP: Moving finance items from one group to another is hassle-free. For a detailed walkthrough, check out our help guide here.

Where does this entry appear in the financial statements?

The financial statement where your Cost of Sales is listed directly by name is the Profit & Loss report.

Cost of Sales also affects the Balance Sheet and Cash Flow statement indirectly because these costs affect the amount of cash available to your business.

In the Cash Flow statement, your Cost of Sales is reflected within the applicable operating cash flow calculations.