Can merchant fees be cogs?

The Cost of Doing Business: Why Merchant Fees Aren’t Part of Your COGS

In the complex world of business finance, accurate categorization of expenses is paramount. While understanding the direct costs of goods sold (COGS) is crucial for assessing profitability, it’s equally important to distinguish these costs from other operational expenses. One area where confusion can arise is the treatment of merchant fees, those charges incurred when processing payments via credit cards, debit cards, or other electronic payment methods. Are these fees simply another component of the cost of doing business, or should they be considered part of the direct COGS?

The answer, and one that has significant implications for accounting practices, is that merchant fees are generally not considered part of COGS.

This distinction stems from the fundamental nature of COGS itself. COGS represents the direct costs directly attributable to the production and acquisition of goods or services that are sold to customers. This typically includes raw materials, direct labor costs, and the costs of acquiring inventory. The key is the direct connection to the creation or purchase of the goods you’re ultimately selling.

Merchant fees, on the other hand, are operational expenses. They represent the cost of utilizing banking and payment processing services to facilitate sales. Think of it as the cost of providing a convenient and modern payment experience for your customers. While these fees are undoubtedly essential to conducting business in today’s market, they are not directly tied to the production or acquisition of the items you’re selling.

Here’s a breakdown of why this distinction is important:

• Clarity in Financial Reporting: Separating merchant fees from COGS provides a clearer picture of the true cost of producing or acquiring your goods. This allows for more accurate margin analysis and better-informed pricing strategies. You can see exactly how much it actually costs you to create your product, independent of the cost of processing the payment.

• Improved Profitability Analysis: Accurately tracking merchant fees as separate operational expenses helps in evaluating the efficiency of your sales and marketing efforts. You can see how much you’re spending on payment processing relative to your overall sales volume and potentially identify opportunities for cost optimization, such as negotiating lower rates with your payment processor or encouraging customers to use payment methods with lower fees.

• Better Budgeting and Forecasting: Understanding the nature of merchant fees allows for more accurate forecasting of operational expenses. By analyzing historical data on transaction volumes and average processing fees, businesses can predict future merchant fee expenses with greater precision.

• Strategic Decision Making: Knowing the true COGS versus the operational expenses associated with sales empowers businesses to make more informed strategic decisions. For example, you might decide to invest in a new marketing campaign if you know that your margins are healthy, even after accounting for merchant fees.

In conclusion, while merchant fees are undeniably a cost of doing business, they are best classified as operational expenses, not as part of the cost of goods sold. This distinction ensures a more accurate and insightful understanding of a business’s financial performance, leading to better decision-making and improved overall profitability. By keeping COGS focused on the direct costs of creating or acquiring your products, you gain a clearer picture of your core business economics and can navigate the complexities of modern commerce with greater confidence.