As an investor, understanding the gross margin profile of
software companies is crucial when evaluating a business relative
to its competitors. Unfortunately, many companies may track their
margins inconsistently or even incorrectly. This is partly due to
the lack of guidance from U.S. GAAP (generally accepted accounting
principles) regarding the software industry and which expenses
should be considered as a cost of goods sold
(“COGS”).
This blog post discusses best practices for COGS classification
for software companies, including grey areas that require
additional consideration when assessing industry standards.
COGS for Software Businesses
For a software company, COGS typically include the
following:
