Okay, let’s be real. If you’ve ever looked at a Profit & Loss report in QuickBooks and thought, “Wait… what even is COGS?”, you are definitely not the only one.

It’s one of those terms that gets thrown around in the accounting world, but it’s rarely explained in a way that actually makes sense to small business owners. 

So let’s fix that.

Here’s how I break it down with clients:

Think about a coffee shop.

You walk in and order your favorite drink. What you’re handed:  the cup, the lid, the milk, the espresso, the syrup — all of that is part of Cost of Goods Sold (COGS). It’s the stuff the business had to buy in order to give you the thing you paid for.

Now think about what wasn’t in your cup:

• The rent for the shop
  
• The electricity
  
• The point-of-sale system
  
• The social media ads that made you come in that morning
  

Those are operating expenses. Ongoing costs that keep the business running, no matter how many lattes are sold that day.

So the big difference is this:

COGS = tied directly to delivering what you sell
Expenses = everything else it takes to run your business

Not a coffee shop? Here’s another example.

Let’s say you’re a virtual assistant.

You invoice a client for $1,200 this month. Great! But maybe you paid a subcontractor $300 to help with a client’s social media content. That cost is COGS because it was directly tied to work you delivered.

Now, the tools you use to run your VA biz (like Canva, ClickUp, Zoom, your website hosting) those are your operating expenses. You’d be paying for them whether or not that client was on your calendar.

Why it matters

Here’s why this stuff is worth paying attention to:

• It helps you price your services so you’re actually making a profit
• It shows you where your money’s really going
• It helps your financial reports make sense
• And it makes tax season way less confusing (COGS and expenses are treated differently)

When you separate these costs correctly, your reports become SO much more useful. You can actually see what’s working, what’s not, and what you might want to change.

A quick gut check

Ask yourself:
👉 Did I need this thing to complete the work I sold? That’s COGS.
👉 Or is this just something I pay for to keep my business running? That’s an operating expense.

And if you’re still unsure, that’s totally okay. This is something I help clients with all the time — and once we clean it up, it makes everything feel more clear and less stressful 🤗