Know Your COGS and SG&A Expenses Before They Eat Your Profits

You can sell more, work harder, and raise prices all you want, if your cost structure is a mess, your profits will leak out the side faster than you can grow them. For most business owners, the trouble doesn’t start with top-line revenue. It starts further down, in the murky middle where expenses pile up and clarity disappears. That’s where your margins get choked, usually without you noticing until it’s already eating into your cash flow.

The two biggest culprits? Direct costs and overhead. Or in accounting terms, COGS (Cost of Goods Sold) and SG&A (Selling, General, and Administrative expenses). Whether or not you know the names, these two categories define how your business spends money, and how much it keeps. Knowing how to track them separately, manage them strategically, and adjust them over time can be the difference between a profitable business and a chaotic one.

Why Splitting Costs Into Two Buckets Actually Matters

Your direct costs are the things you only pay for when a sale happens. For a contractor, that might mean materials and subcontractors. For an agency, it could be freelance labor, stock assets, or per-client software. These are expenses tied directly to delivery, the cost of producing the thing you’re selling.

Overhead, on the other hand, is everything you’d be paying whether or not a client walks through the door. Think rent, software, payroll, marketing, utilities, insurance, and administrative salaries. These fixed or semi-fixed expenses keep the business running, but don’t rise and fall with individual sales.

When you mix the two together in your bookkeeping, or worse, ignore the distinction altogether, you lose the ability to understand your margins, price your offerings correctly, and grow without sinking. Separating them helps you see how efficient your delivery model is (gross margin), and how sustainable your entire business is (operating margin).

Here’s the short version: if your delivery costs are too high, you’ve got a pricing or process problem. If your overhead is bloated, you’re spending too much to run the engine.

Spotting the Hidden Issues in Your Cost Structure

In a perfect world, your direct costs would scale neatly with sales, and your overhead would stay steady as you grow. But business isn’t tidy. In real life, cost creep is a constant threat. New software gets added to your stack. Old subscriptions never get canceled. You bring on a part-time contractor that becomes a full-time role. You double your ad spend, but not your leads. All of this compounds quietly.

The worst part? Many small business owners don’t know where the waste is happening because their expense categories are a disaster. When you look at your P&L and see everything buried under “Operating Expenses,” you have no idea what’s helping you grow and what’s dragging you down.

That’s why it’s worth getting disciplined. Go through your cost structure with a fine-tooth comb and ask two questions: Would I still incur this expense if I didn’t have any clients? And does this expense scale with revenue? The first question helps you tag it as indirect. The second confirms whether it belongs in the delivery bucket. Everything else is probably just noise.

Service-Based Businesses: It’s Not as Simple as It Looks

Product businesses usually get this right faster. You can clearly see the cost of goods, inventory, packaging, shipping, and fulfillment. The numbers are tangible. But if you’re running a service-based business, it’s easier to assume that you don’t have delivery costs at all. That’s a mistake.

Even if you’re selling time or expertise, you still have project-based tools, client-specific contractors, or production costs that rise and fall based on workload. Separating those out allows you to see how efficient your team really is. More importantly, it shows you how much of your revenue goes toward execution versus operations.

Let’s say you run a creative studio. Your lead designer works across all accounts. Their salary is overhead. But the photographer you hire for one client’s project? That cost belongs in your delivery bucket. The client-specific editing tools? Same. When you track these cleanly, you’ll finally see which offerings are the most profitable, and which ones are draining resources.

How to Get Cleaner, More Actionable Financials

You don’t need a finance degree to build clarity. You just need a process. Start by working with your bookkeeper (or CFO if you’ve got one) to recategorize your expenses in a way that reflects how your business actually functions. Break down your costs into delivery vs operations. Review your chart of accounts, and make sure every line item is placed intentionally.

Then commit to reviewing it monthly. If you’re not watching your costs regularly, you’re just waiting for a surprise. Pull a report, look at the trends, and ask yourself what’s changed. Did delivery costs spike last month? Why? Did admin spend grow while revenue stayed flat? That’s a red flag.

Keep it simple, but not sloppy. You’re not aiming for forensic-level detail. You’re just building the habit of financial awareness. Once you’ve got a clean view of your cost structure, you’ll make faster, smarter decisions every time something shifts in the business.

Using Financial Data to Guide Better Decisions

A clean separation between your core costs and your operating expenses unlocks more than just tidy books, it helps you lead. You’ll know which service lines to scale. You’ll know which offerings need a price bump. You’ll see where team efficiency is lagging. And when it’s time to cut back, you’ll know where to look first without gutting your ability to serve customers.

It also helps you build more accurate forecasts. Once you understand how much it costs to deliver each product or service, you can map revenue projections with a higher level of confidence. And once you know how much it costs to run the business in the background, you’ll know what sales volume is needed to hit your goals.

Gross margin tells you whether your offering is profitable. Operating margin tells you whether your business is. The better you understand both, the better you’ll be at steering the ship.

The Bottom Line

You don’t need to memorize accounting acronyms to run a profitable company. But you do need to understand how your expenses behave. When you stop treating all costs the same and start measuring them for what they really are, tools for delivery or tools for growth, you unlock real clarity.

And when you’ve got that clarity, profitability isn’t some mystery to be solved. It’s just a math problem you already know how to work.