Cost of Sales – What It Is and Why It Matters
Cost of Sales (sometimes called Cost of Goods Sold) is one of those numbers you’ll often hear about when reviewing your operating costs and the overall profitability of your business.
But what exactly does ‘Cost of Sales’ mean? And how can understanding this figure help you get a better grip on the financial efficiency of your operations?
What is ‘Cost of Sales’?
Cost of Sales (CoS) measures the direct costs involved in producing or acquiring the goods or services your business sells over a given period.
Think of it as the money that leaves your business with each sale.
For a product-based business, it’s the cost of raw materials, the labour directly involved in making the product, or the wholesale price of items bought for resale.
For a service-based business, it’s the direct labour or subcontractor costs for delivering that service.
Understanding your CoS is essential for knowing the true profitability of every product or service you sell.
How can CoS impact your business?
CoS is a powerful metric. Spend too much and your profit margins shrink. Spend too little and quality may take a hit.
Here’s what your CoS can reveal:
Profitability
A high CoS reduces your gross profit margin, leaving less money for operating expenses and ultimately shrinking your net profit. Managing CoS well is crucial for long-term sustainability.Pricing strategy
CoS guides your minimum selling price. If costs are too high, underpricing will lead to losses. If prices are too high, you risk losing customers. Finding the right balance ensures profitability without pricing yourself out of the market.Inventory management
For product-based businesses, CoS is linked to inventory value and movement. Reducing waste, avoiding stock obsolescence, and managing stock levels effectively can lower your CoS and free up cashflow.Operational efficiency
Reviewing your CoS can uncover inefficiencies in production or service delivery—whether it’s excess material waste, overstaffing, or unproductive labour. Streamlining these processes directly reduces costs and improves performance.Financial health
Keeping CoS under control strengthens your gross profit margins, boosts operational efficiency, and makes your business more attractive to lenders and investors—helping you secure funding when needed.
Talk to us about reviewing your Cost of Sales
If you want to improve your business’s financial health, start with your CoS. It’s one of the fastest ways to strengthen profitability, free up cash, and create room for growth.
Book a time with our team to review your numbers. We’ll help you pinpoint cost savings, streamline operations, and get your CoS working in your favour.