Direct answer

How to calculate gross margin and COGS

Gross profit equals revenue minus cost of goods sold. Gross margin equals gross profit divided by revenue. COGS includes costs directly required to deliver the product or service and that change with delivery volume. Keep the policy consistent and separate from operating expense.

  • Define revenue and COGS scope
  • Put direct delivery costs in COGS
  • Review margin by product or stream
  • Use amounts when revenue is very low

01Review area

Set classification policy

  1. 01

    Ask whether the cost follows delivery

    Usage-based cloud, payment fees, components, logistics, and delivery labor are common COGS candidates. Management and product R&D are usually operating expenses.

  2. 02

    Prevent duplicate cost

    If labor is already included in delivery cost, do not also include the full salary in operating expense.

02Review area

Build the margin forecast

  1. 03

    Model cost by revenue stream

    Subscriptions, hardware, projects, and licensing have different cost structures. Calculate each, then weight them by revenue mix.

  2. 04

    Give efficiency improvement a cause

    Margin can improve through vendor pricing, automation, volume discounts, or mix. Do not raise it only because the calendar advances.

03Review area

Check interpretation risks

  1. 05

    Use amounts when revenue is low

    When revenue approaches zero, margin percentages can swing or lose meaning. Review gross profit amount and fixed delivery cost too.

  2. 06

    Test price and cost separately

    Lower prices, higher cloud costs, or weaker hardware yield can reduce margin and increase funding needs.

What Tessly can help with

Keep assumptions, calculations, and decisions in one model

Tessly organizes COGS policy by revenue type, calculates gross profit and margin, and compares price and cost scenarios.

Tessly does not make accounting classification decisions. Material classification and recognition questions require finance or accounting review.

Build a forecast

FAQ

Frequently asked questions

What is the gross margin formula?

Subtract COGS from revenue, then divide by revenue. When revenue is zero, do not force the result into a meaningful percentage.

Are SaaS cloud costs COGS?

Cloud costs that rise directly with customer usage or service delivery are often treated as COGS, but the company should apply a consistent policy.

Is customer support payroll COGS?

It depends on whether the work directly supports delivery. Mixed roles may require a reasonable and consistent allocation.

Should gross margin improve every year?

Not necessarily. Scale can help, while discounts, mix, supplier costs, and service intensity can reduce margin.

Next step

Put this question back into the full financial model

Continue with the runway and burn rate guide or the 12-question fundraising checklist.

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