Let’s say you run a business that does a bit of everything, you sell products, offer services, or maybe bundle them together into irresistible packages. Sounds like a dream, right? But when it comes to your financials, mixing it all together can turn that dream into a bookkeeping nightmare.
If your income statement just has one big lump called “Revenue” and one general “Cost of Good Sold (COGS)” line, we need to talk.
Here’s why separating your service and product revenue (and their associated costs) can help you unlock better decisions, cleaner reporting, and higher profits.
Services and Products Are Apples and Oranges
Think about it. Selling a candle and offering a home spa service might both smell nice, but they work very differently on your books.
- Product revenue comes from selling a physical item. You’ve got direct costs like materials, packaging, shipping and maybe warehousing.
- Service revenue comes from your time or expertise. Your costs? Likely wages, software, or maybe travel expenses.
Lumping them together is like putting apples and oranges in a blender; what you get is a smoothie you can’t make sense of.
What Happens When You Separate Them?
You gain Clarity, Control, Confidence. Let’s break it down.
1. You Can Measure True Profitability
Your products might be flying off the shelves, but are they actually making money? If you’re spending $8 to make a $10 product, your margin is razor thin. Services, on the other hand, might have lower direct costs and be far more profitable.
Knowing the gross margin of each line lets you double down on the more profitable one, or raise prices where needed.
2. You Can Price Smarter
Ever wonder if you’re undercharging for your service or over discounting your product bundles? Without clear numbers, you’re guessing.
When you track revenue and COGS separately by line of business, you can price based on data, not gut feelings.
3. You Can Manage Inventory More Effectively
If your COGS include both labor and materials in one messy bundle, it’s hard to know what’s causing margin swings. Is it rising labour costs? Or are your candles costing more to produce? Separating product related COGS helps you spot trends faster.
4. You Can Prepare for Growth (or Funding)
Whether you want to attract investors or just sleep better at night, detailed reporting makes your business look professional and prepared.
Want to franchise? Expand your service offerings? Open an online store? Clear data gives you a map, not just a compass.
Okay, But How Do You Do It?
Here’s the simple version:
- On your income statement, separate Product Revenue and Service Revenue
- Track COGS for Products (materials, packaging, shipping)
- Track COGS for Services (contractor wages, tools, software)
- Bonus: use class or department tracking in your accounting software to get even more detailed
Real Talk from a Toronto Based Accounting Firm
At Vistance Accounting, we’ve helped businesses untangle their financial spaghetti more times than we can count. The result? Owners finally see where their money is going, stop underpricing their services, and start owning their numbers.
One of our clients, a local wellness studio, was combining massage services with product sales like oils and candles. After separating the revenue and COGS streams, they realized their products were eating away at their margins. One small accounting change led to a big strategic pivot, and better cash flow.
Final Thought
Your business might be both a shop and a service, but your books shouldn’t be. Separating revenue and COGS by category is more than accounting, it’s about empowering you to make smarter, faster, more profitable decisions.
Need help sorting it all out?
Vistance Accounting is here for Toronto small businesses ready to grow with clarity.
Let’s clean up your books, so you can get back to doing what you do best, building your business.
Contact us today to schedule a free consultation.
