Packaging and shipping feel like product costs, but they land in expenses, not COGS. Stephen Brown draws the line at the warehouse: COGS covers producing the product and getting it there, and everything after that is an expense. Then he walks the P&L order, revenue minus COGS gives gross profit, minus sale related and overhead expenses gives operating income, and explains what a high gross profit with low operating income is telling you.
Profitability
Ecommerce COGS vs. Expenses Explained: Key Differences
3 min
Transcript
0:00 What counts as COGS
I'm Stephen with LedgerGurus, and in this video I'm going to explain ecommerce expenses versus cost of goods sold, or COGS.
COGS are the cost of producing your product and getting it to your warehouse ready to fulfill. For a deeper dive on COGS, see my video, "COGS Explained for Ecommerce Sellers."
0:17 Sale related expenses
Now, you might remember from my video on COGS versus cost of sales, but there are additional expenses that go into a sale. So that could be things like your packaging for fulfillment, the actual shipping costs, things like advertising, merchant service fees. And those are also expenses, but those are not cost of goods sold. I know it's confusing.
Those go down into the expenses category, because cost of goods is cost of goods. They're sale related, but they are an expense.
0:49 Overhead expenses
But wait, there's more. Running an ecommerce business involves other expenses that aren't related to the sale. These are often known as overhead expenses that are necessary.
So what goes into overhead? Well, a big one is payroll. You gotta pay your people, right? And that costs money. That usually is the biggest piece of overhead for most businesses. For an ecommerce business, that could also be things like rent for your warehouse, for your office space, whatnot. And don't forget the software. There's a lot of software in ecommerce. And any other expense that is not related to sales. So that plus the cost of sales expenses are all of your expenses.
1:22 Where costs fall on your P&L
Now, let's talk about where these costs fall on your income statement or profit and loss. There's a particular order and it's important to understand.
So on your profit and loss statement, at the top you have your sales or revenue. Below that you have your cost of goods sold, or COGS. Subtract COGS from revenue and you get your gross profit. This is what you've made from your products before any other expenses.
After gross profit, we list out all of the other expenses. That includes your non-product sales expenses, and then your overhead expenses. Your expenses make up your operating expenditures. Subtracting your operating expenses from your gross profit gives you your operating income, which is a measure of profitability of your business operations.
It's really important to understand the order of your income statement because it tells you a lot about your business. For example, a high gross profit business with low operating income could show you that your business overhead is too high. Understanding the key points in your income statement will help you optimize the right areas of your business.
So if this was helpful, like it, ask me a question in the comments, share it, and subscribe to our channel where you'll get more ecommerce and finance insights like these.