Metrics: Cost of Services (COS)
What Cost of Services is
Cost of Goods Sold – or “COGS,” as the kids say – is the cost associated with delivering a product. In the context of a design or technology agency, COGS can be referred to as Cost of Services (COS) or Cost of Services Rendered (COSR). These are the costs associated with delivering the agency’s services. They can include:
Salaries of billable team members
Benefits of billable team members
Taxes of billable team members
Costs of contractors hired to help deliver client services
Software and supplies used to deliver client services
Costs that are passed through to the client
Travel to deliver client services
On most profit & loss statements, you’ll see COGS broken out from other expenses (more on that below).
Why Cost of Services matters
Understanding how much it costs to deliver your agency’s services helps you to understand how you can improve profitability.
Using COS, we can calculate the profit your agency makes from delivering its services (i.e., gross profit). If the overall profitability of the agency (i.e., net profit) is lower than you want it to be, we can then take a look at whether the cost of delivering its services is too high and create goals to make delivery of the services more efficient.
To take it to the next level: agencies with good hours tracking processes can look at gross profit by service or gross profit by client type. This then allows them to invest more in the services that are most profitable and to divest from less profitable services, if they’re not essential to the agency and can’t be optimized.
Finally, knowing the agency’s COS allows us to benchmark against industry standards. This gives leadership a sense of how the agency is similar to or different from others in the space. That delta can be an intentional, strategic differentiator or an unintentional oversight that needs to be fixed.
COS Lookup Table
Many agencies are starting to plan for next year. If your agency has a revenue target and a gross profit margin target, you can calculate how much you can budget for Cost of Services with the lookup table below:
Additional resources
If you’re not tracking your COGS, I provide consulting and fractional leadership that can help you get started and then make better use of COGS data in your planning. Just grab a time with me here.
I’m also happy to refer you to partners I’ve worked with on the accounting and bookkeeping front – just get in touch. ❦
Disclaimer: I am not a Certified Public Accountant (CPA), and this article is not intended as financial or tax advice. The information provided here is for educational and informational purposes only. Please consult with a qualified accounting professional or CPA for advice specific to your agency's financial situation.
