Calculating the cost of goods sold for services isn’t exactly the same as calculating the cost of goods for product-based industries, but you can adapt the formula to help you determine your own self-care business’ profitability. While it takes a bit of math (boo!), it can reveal essential information you can use to further your financial goals. 

How to Calculate Cost of Goods Sold for Self-Care Services

The cost of goods sold (COGS) is one of many metrics businesses use to calculate and evaluate their financial standing. Understanding COGS can put spending in perspective, even for businesses that don’t deal directly with material goods. This article will explore COGS and how it can work for service-based businesses, as well as how to calculate cost of services sold to get a better snapshot of your business’ financial health. 

What Is the Cost of Goods Sold in Beauty & Wellness Businesses?

The cost of goods sold typically refers to how much a company spends on product-related business expenses. However, this can be trickier to determine in a service-based business where goods are not typically sold. If you run a beauty and wellness company, you’ll have to adapt your calculations to measure the cost of your services – which have now become the “goods.” Service-based goods may include things like hair products or equipment for a salon, employee commissions, even shipping costs. 

Why is the Cost Of Goods Sold Key For Beauty & Wellness Businesses?

COGS is key for beauty and wellness businesses for a number of reasons. Below, we break down some of the most important ones. 

Helps Business Owners Understand Their Costs

Once you understand COGS, you can better analyze your spending and make adjustments based on which expenses need more or less investment. While your overhead costs and other fixed expenses aren’t part of the COGS calculation, it can still give you better insight into your current financial strategies and whether or not they can lead to success. 

Provides More Profit Clarity

With COGS, self-care business owners can more accurately calculate their profit margins, which can help lay out just how much they’re making from each service offered. Understanding your profits will help you figure out what is and isn’t working for your business, and where to make adjustments. 

Offers a Competitive Edge

COGS can give beauty and wellness business owners an edge by allowing them to adjust their prices to competitive rates, while also maintaining profitability. This can be a crucial step in ensuring you reach as wide a clientele base as possible, and are constantly adapting to grow your business. 

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How to Calculate Cost of Goods Sold in Beauty & Wellness Businesses

Figuring out the cost of goods sold for services doesn’t have to be as challenging as it sounds. Keep reading to view our guide on how to calculate cost of services sold to help you better understand the financial profile of your self-care business.  

Identify Your Direct Costs

In order to properly determine COGS for service businesses, you’ll first have to identify all the direct costs associated with the services you provide over a specific period of time. For example, if you own a massage studio and you’re calculating for the year, you could include the cost of your tools, products, and equipment. The lower your direct costs, the better your profit margin will be. 

Factor in Cost of Labor

While regular wages and salaries are not included in COGS for service companies, direct labor is – which means you’ll have to include any commission costs in your COGS calculations. For example, when calculating for the year, if your masseuse makes $60,000, but also earns 60% commission on each client, you would include the total commission wages for the year, but not their $60,000 salary. 

Include the Cost of Inventory Management

Even if you don’t sell products directly to your clients, you’ll have to determine the cost of storing, maintaining, and ordering necessary items for your inventory to ensure your services continue to run smoothly. For instance, if your massage studio keeps refrigerated lotions on hand for client aftercare, you would have to consider the cost of special ordering and storing these goods at your site. 

Calculate With the COGS Formula

To figure out the cost of goods sold for services, you can adapt the following formula to plug in your variables: 

COGS = Starting Inventory + Direct Purchases Made - Final Inventory 

• Starting inventory: The starting cost of your service expenses (a.k.a. “goods”) for a period of time.
• Direct purchases: The cost of additional purchases during a period of time.
• Final inventory: The cost of your remaining inventory at the end of this period of time.

Let’s apply this formula to a massage business calculating the COGS for the year: 

• Starting inventory: $10,000 (accounting for oils, lotions, and disposable gear).
• Direct purchases: $6,000 (for new massage beds, new towels, and employee commission).
• Final inventory: $2,000 (the total amount of “goods” remaining at the end of the year).

$10,000 (Starting Inventory) + 6,000 (Direct Purchases) - $2,000 (Final Inventory) = $14,000 (COGS)

Once you’ve done the math, you can then calculate your Gross Profit by subtracting the COGS from your Total Revenue. 

Total Revenue - Total COGS = Gross Profit

Using the same COGS from above, let’s say the total revenue for your massage business was $50,000 for the year.

$50,000 (Revenue) - $14,000 (COGS) = $36,000 (Gross Profit)

4 Expenses Not Included in the Cost of Goods Formula for Beauty & Wellness Businesses

When calculating the cost of goods sold for services, it’s important that you also know which expenses not to include (unless you’re looking to have a run-in with the IRS!). 

1. Operating/Fixed Costs

COGS for service businesses cannot include expenses for things like rent, operating costs, payroll, insurance, and utilities (i.e., water, electricity, and internet). Only your direct costs for materials explicitly tied to client services will be relevant for your numbers.

2. Salaries

Employee salaries should not factor into your costs. However, commission is an exception because it is directly related to the execution of the service, and therefore qualifies as a labor cost. (Unlike employee salaries, which are considered a fixed cost as they are paid regardless of service performed.)

3. Marketing and Advertising

Business expenses related to promotions or advertising are unfortunately not part of the COGS calculation. Since marketing is not directly tied to execution of services, you cannot include them as a ‘good’ for your beauty and wellness business.

4. Office Supplies

Stationery, cleaning materials, and other general supplies that are not directly linked to self-care services should be excluded from COGS for service companies. 

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Join GlossGenius and Take Control of Your Beauty & Wellness Businessʼ Profitability

Accurately calculating COGS can positively impact the financial health of your beauty and wellness business. By tracking your costs and expenses, you can better prepare for your future, set competitive rates, maximize your profits, and ensure you don’t end up in the red. 

GlossGenius is your all-in-one solution for a seamless experience. With a number of useful features at your fingertips, you can optimize your tasks and boost your efficiency, streamlining your day-to-day operations and giving you more time to interact with clients. As a business owner, GlossGenius can make it easier to manage your profitability with features like Finances, Loans, Reports & Analytics, and Payments.

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