Every company spends money to keep its doors open and sell products or services. But not all expenses are created equal. If you look at a business’s financial statements, you’ll see two big categories called COGS and OPEX. Those labels pop up everywhere—yet they still trip people up.
Let’s break down what each one actually means, how they differ, and why it genuinely matters for both business owners and anyone interested in how companies run.
What Does COGS Really Mean?
COGS stands for Cost of Goods Sold. Think of it like this: if you own a bakery, every loaf of bread you sell required flour, yeast, electricity for the oven, maybe even wages for workers specifically baking those loaves. The sum of those direct costs—that’s your COGS.
COGS covers things like raw materials, labor directly tied to production, and basic overhead for manufacturing. If you make furniture, COGS includes wood, paint, hardware, workshop labor, and maybe even the electricity your machines use.
You’ll see COGS mentioned mostly with product-focused businesses. So, manufacturers, restaurants, retailers—if you sell a thing, not just an idea or service, COGS is a big deal for you.
How OPEX Shows Up on the Books
Now let’s look at OPEX, which means Operating Expenses. These are the costs of just running the business, whether or not anything is sold that day.
Rent for your shop, internet bills, marketing, office supplies, salaries for the staff in HR or customer service—these all sit in OPEX. They’re about keeping the lights on, attracting customers, paying people to answer the phone or do bookkeeping. You pay these even when sales are slow.
OPEX shows up in almost every business, including those that don’t sell products. It’s often where small business owners look to cut costs if things get tight.
COGS vs OPEX: So, What’s the Real Difference?
Here’s where most people get confused. COGS and OPEX both sound like “expenses,” but they go into different buckets.
COGS is only the stuff you absolutely had to spend to make or buy the thing you sold. OPEX is everything else—costs you need to keep the business running, but not directly tied to what you sell.
On financial statements, COGS appears right below revenue, leading to gross profit. OPEX comes later, after gross profit, subtracting down to operating profit.
Say you run a coffee shop. The coffee beans, milk, and barista pay for making drinks—those are COGS. The electricity in the dining area, the marketing flyers on the street, or the accountant’s salary—those go into OPEX.
COGS affects your gross margin, showing how profitable your product or service is before considering broader overhead. OPEX affects operating margin, which tells you how efficiently the whole business is run after direct production costs.
How Do You Figure Out COGS?
Calculating COGS isn’t always as obvious as it sounds. Here’s the basic approach:
Start with your inventory at the beginning of the period. Add any purchases or manufacturing costs during the period. Then, subtract the value of your ending inventory.
So, the formula:
COGS = Starting Inventory + Purchases During the Period – Ending Inventory
It gets trickier if you make your own stuff. You need to figure in raw materials, wages for people on the production line, and sometimes a share of utilities for factory space.
Outside influences—like rising supplier costs or unexpected shipping fees—can change your COGS a lot from month to month.
Managing OPEX: Can You Really Control It?
OPEX tends to be steadier from month to month compared to COGS. But in a pinch, companies often try to trim OPEX first.
Some strategies for keeping OPEX in check:
– Negotiate better deals on rent or utilities.
– Outsource non-core tasks (think payroll, cleaning, or IT support).
– Cut back on discretionary spending: office snacks, conferences, travel.
– Use accounting tools to track spending and spot waste.
Planning an OPEX budget helps a lot. It lets you predict expenses, notice spikes, and avoid “leaky bucket” problems. If you spot your OPEX inching up, that’s usually a red flag to take action quickly.
Why Both COGS and OPEX Matter for Your Bottom Line
These two numbers matter for different reasons in financial analysis. COGS points to how efficiently you turn materials and labor into products. If your COGS is low, you make more on every sale.
OPEX, meanwhile, speaks to your skill at running the business day-to-day. A company might have fantastic gross margins but still lose money if rent, admin salaries, or advertising eat up profits.
Investors keep a close eye on both. Lenders and buyers often check COGS and OPEX ratios to see if a company’s healthy—or just floating by, burning cash.
What People Usually Get Wrong About COGS and OPEX
Believe it or not, people mix these up all the time. One mistake is putting all employee salaries in OPEX, even when some are directly tied to making products.
Another is counting warehouse rent as OPEX when it’s really part of COGS for storage of inventory. Or, someone might include shipping as OPEX, even though shipping to customers is considered COGS for many businesses.
If you’re unclear about where an expense goes, ask: does this cost exist only when I sell something, or is it part of running operations? Your accountant (or a good accounting tool) can guide you if you’re still unsure.
What This Means for Running a Business
Knowing the split between COGS and OPEX isn’t just for big companies and accountants. If you own a startup or run a growing side project, tracking these numbers gives you a clearer story about where your cash actually goes.
Let’s say your gross profit is strong, but operating profit is weak. That’s a nudge to review OPEX. If both are lean, you’re probably doing something right.
And if you need an extra hand with streamlining or want to look deeper into cost categories, there are practical guides at Backlight Center that break down business finances in plain English.
Frequently Asked Questions About COGS and OPEX
Do all businesses have both COGS and OPEX?
Product-based businesses always have COGS. Service-based companies may not, since they aren’t selling physical products, but they all have OPEX.
Can COGS be zero?
It can, if you don’t sell any physical products. Software companies, consultants, or agencies sometimes have zero COGS but plenty of OPEX.
Are salaries always OPEX?
No. Salaries for people making the product (like chefs, assembly line workers, or machine operators) usually go under COGS. Admin, marketing, and executive salaries are OPEX.
How often should you recalculate COGS?
Most do it monthly or quarterly so they can keep track of margins and spot price changes early.
Is it better if COGS and OPEX are low?
Lower costs help, but if you cut too much, you risk hurting product quality or service. It’s about finding the right balance for your business.
Bottom Line: Why the Split Matters
COGS and OPEX shape how much money a company truly makes on sales and how efficiently it operates. For people trying to read a business’s health—or just keep their own company in the black—understanding the difference is crucial.
The best-run businesses watch both numbers closely. They know which levers to pull when profits dip, whether it’s renegotiating supplies (COGS) or cutting back on rent (OPEX). In the end, it comes down to clarity. When you know where your money’s going, you give yourself a much better shot at real, sustainable growth.