Your Cost of Sales (CoS) is more than just a line on your financial reports—it’s a key indicator of how efficiently your business is operating and how healthy your margins really are.
We’ve highlighted five important ways CoS affects your business, and why it’s worth keeping a close eye on.
So, what is Cost of Sales?
Cost of Sales (also known as Cost of Goods Sold) refers to the direct costs involved in producing or delivering what you sell.
For product-based businesses, this includes materials, manufacturing, and wholesale costs.
For service-based businesses, it’s the labour or subcontractor costs tied directly to delivering your services.
In short, it’s the money that goes out the door with each sale—and understanding it helps you see the true profitability of your offering.
Why does CoS matter?
Here are five ways your CoS impacts your business:
1. Profitability
A high CoS eats into your gross profit margin, leaving less to cover operating expenses and reducing your net profit. Keeping CoS in check is essential for sustainable earnings.
2. Pricing Strategy
Knowing your CoS helps you set prices that are both competitive and profitable. If your costs are too high, you risk underpricing. If they’re too low, you may be compromising on quality.
3. Inventory Management
For product businesses, CoS is closely tied to inventory. Efficient inventory management—like reducing waste or avoiding overstock—can lower your CoS and improve cash flow.
4. Operational Efficiency
Reviewing your CoS can highlight inefficiencies in production or service delivery. Whether it’s excess material use or unproductive labour, streamlining operations helps reduce costs and improve performance.
5. Financial Health
Strong cost control builds a solid financial foundation. It improves margins, boosts cash flow, and makes your business more attractive to lenders and investors.
If improving your financial health is a priority, understanding your CoS is a great place to start. It can reveal valuable insights, highlight opportunities, and help you take practical steps toward better efficiency.
Ready to take control?
Let’s book a time to explore your numbers and strengthen your profitability.
About Pathfinder Solutions
Pathfinder Solutions advisory team members have either owned or managed businesses, or are investors themselves, so we know first-hand the challenges you face in your world.
Sure we’re Accountants, but the best solutions in business come from focusing on more than just the numbers. Our real-world business experience delivers just that.
