How to Track Cost of Services Sold (COSS) and Why It Matters
If you're a service-based business - think professional services, media, recruiting, digital agencies, tech support, or eLearning, you may not have inventory, but you still have a cost tied directly to delivering your services. That’s where Cost of Services Sold (COSS) comes in.
Understanding and tracking your COSS is essential to evaluating profitability, setting sustainable pricing, and planning for growth. Yet, many small to mid-sized businesses overlook this metric entirely or mistake it for general overhead.
What Is Cost of Services Sold?
COSS refers to the direct expenses incurred to deliver your service. It’s similar to Cost of Goods Sold (COGS) for product-based businesses, but tailored for service providers. This includes:
Contractor or employee wages directly tied to service delivery
Software or platforms required to provide the service
Outsourced vendor costs
Travel expenses necessary for project completion
Supplies used during client-facing work
Licensing fees related to service delivery
It does not include marketing, admin salaries, rent, or general operations - that’s overhead.
Why COSS Matters
1. It Helps You Understand Real Margins: You might be billing $10,000 per client—but if you're spending $6,000 to deliver that work, your margins are tighter than they look.
2. It Informs Your Pricing Strategy: Knowing your direct service costs allows you to price for profit, not just to cover the basics.
3. It Highlights Inefficiencies: Are your projects taking longer than expected? Are contractors costing more than planned? Tracking COSS helps you fix leaks in your delivery model.
4. It Improves Financial Forecasting: When you know the direct cost to deliver a service, you can forecast project profitability and resource needs more accurately.
How to Track COSS in Your Bookkeeping
1. Customize Your Chart of Accounts: Work with your bookkeeper to separate COSS categories from general operating expenses. This makes your financial reports more meaningful.
2. Tag Direct Costs to Client Projects: If you're using a platform like QuickBooks Online, take advantage of job costing or class tracking to tie expenses to specific services or clients.
3. Track Contractor Hours and Project Allocation: Use time-tracking tools to calculate how much labor cost is tied to each service or client engagement.
4. Review Monthly Reports With COSS Breakdown: Your income statement should clearly show your gross profit after COSS is deducted from revenue. That’s a clearer picture of operational health.
How The Hazel Group Helps Service-Based Businesses Track COSS
We work with digital, remote, and professional service businesses to organize their books in a way that reveals insights—not just expenses. Our bookkeeping packages include:
Customized chart of accounts setup
Categorization and coding of direct service costs
Monthly income statement with COSS and gross margin tracking
Strategic meetings to discuss pricing, profitability, and performance
If you need more advanced support, our fractional CFO services can help you model project-based profitability and adjust for seasonal or growth fluctuations.
Want to know how much it really costs to deliver your services? Schedule a 30-minute consultation with The Hazel Group to get a clearer picture of your business performance.
