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Accounting rules are very specific on some things, and surprisingly unhelpful in other areas. There are no Generally Accepted Accounting Principles (GAAP) rules on the type of costs that are included in Cost of Goods Sold (COGS).  This is unfortunate because the gross margins of SaaS businesses are very important to overall performance, profitability, and valuation. Having analyzed over 1,000 SaaS company financial statements, SaaS Capital has pulled together our thoughts on the subject. Here is what we generally see included, and what we recommend. Costs we recommend including in COGS: 1. Hosting Costs 2. Employee costs related to keeping the production environment running 3. Employee costs for customer support/success of the application, but excluding any sales costs for up-sells, or cross-sells 4. Cost of any third-party software or data that is included in your delivered product 5. Any other direct employee costs required to deliver the ongoing service Also in...

The cost of a business's inventory goes well beyond just the wholesale cost of goods on the shelves. The business has to get those goods to the shelves in the first place -- and that means paying freight charges. In most cases, the freight charges involved in acquiring inventory can be rolled into the cost of that inventory as reported on the company's balance sheet.  Freight In The Internal Revenue Service says a business may include in its inventory cost all the "ordinary and necessary" expenditures of acquiring goods and getting them ready for sale. That specifically includes freight in, or the costs of delivering goods from a supplier to the business. If the company makes products rather than buying them for resale, the freight-in costs of raw materials and parts also can be included in inventory cost.  Freight Out Once a business has goods in its possession, it can't include any further freight charges in inventory cost. For example, if a compan...

UNICAP is short for Uniform Capitalization. That probably doesn’t even help explain it. The IRS Code Section 263A is all about the Uniform Capitalization rules. In general UNICAP is the amount of costs that a company needs to capitalize related to their inventory. As you might suspect, that means it only applies to companies with inventory. Any company that produces real or tangible personal property or acquires it for resale might need to apply the UNICAP rules and have a UNICAP adjustment.  As with any Code Section there are exceptions to the UNICAP rules. The biggest exception is that companies with average gross receipts of $25M or less over the past three years are exempt. That means a little company with small sales and small inventory numbers doesn’t need to bother making a UNICAP adjustment, which would just be tiny anyway. The UNICAP only applies to those companies with over $25M in gross receipts.  The UNICAP adjustment takes a method of determining how m...