COGS sits at the top of your P&L, right below revenue. Revenue minus COGS equals gross profit. Everything below gross profit comes out of that gross profit — which means COGS is the first place to look when gross margins are weak.
What counts as COGS
For a product business: raw materials, manufacturing costs, freight in, direct labor. For a service business: subcontractors, direct labor on client work, and materials consumed in delivery. What doesn't count: rent, marketing, admin salaries, insurance — those are operating expenses.
Why COGS management matters
Your gross profit margin is a direct function of COGS. If your COGS creep up and your margin drops, every fixed cost becomes harder to cover and every other metric suffers downstream.
COGS and the Labor Efficiency Ratio
In Greg Crabtree's Simple Numbers framework, direct labor is separated from COGS and tracked separately as part of the LER calculation. This makes it possible to see how efficiently labor converts to gross profit.
See these numbers in your own monthly Clarity Report.
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