Founder Q&A

Q : The founder of a software company asked us, “What is the most appropriate way to classify COGS for a company that has gone from pre-revenue to revenue when the company was spending with various vendors to develop the product prior to selling any of the product? In addition to this, wouldn’t gross margins be way off in the early stages?”

Carpe Digits founder Marissa Jones replied with this “COGS should not necessarily be about the vendor but rather about the actual definition of COGS which is the direct cost related to the sale of products (or services).  It also sounds like you might be missing out on some R&D capitalization if you are booking all pre-revenue to COGS.  I believe in starting with GAAP-compliant metrics that make sense for your company and investors, then working from there. For example, if I need to know exactly what a unit costs to sell then I need to have COGS calculated correctly. For software, you would be measuring the costs to build and run the product. You should be able to tell exactly what it costs at any given period of time to keep the product up and running for sale. As long as you are able to achieve this result, then your pre-revenue COGS should not matter. 

With regards to “gross margins being off in early stages”, the answer may be different depending on your investors and funding stage. Overall, expenses incurred in early stages should not be an issue as you are likely reporting on pre and post-rev milestones and have that well documented.”

If this sounds like a question you have asked yourself, contact us today and we can advise more specifically.

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