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  1. #1
    Join Date
    Mar 2004
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    550

    Staff costs are Cost of Revenue or Expense?

    I'm curious how companies in this industry are treating staff costs. For example, we have some contract employees who provide customer support and also do system admin on our servers. They work for us full-time, but they are not treated as employees but rather invoice us as contractors (because they are in a different country and it's a lot of trouble to set up a local affiliate there just for 2 people).

    We're in the SaaS business, so they work they do is vital to delivering our service. That would make it seem like being a cost of revenue (same as COGS but no "goods"). On the other hand, they also do some tasks like programming (both adding feature to our softwaer product, and writing scripts to help with server maintenance), and R&D costs are typically treated as an expense (at least for software companies).

    The difference about whether to treat them as cost of revenue or an expense would affect our gross margin. I imagine such a number would come under scrutiny if the business were ever being reviewed by potential buyers.

    Other costs are quite clearly cost of revenue, like colo fees, bandwidth, etc. It's the contract workers that I really wonder about. Maybe a potential buyer in this industry expects the cost of revenue to consist only of non-human costs?

    Right now, our accountant has put these contract employee costs as cost of revenues, but she's also not very familiar with this industry. Are others treating items like this as cost of revenues or an expense?

  2. #2
    Join Date
    Mar 2007
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    United Kingdom
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    They would still be a Cost to your company because you are invoicing your for a service... But it is still cheaper then not having them on payrol.. Even Payroll counts as a cost or a loss against your profits...

    If the revenue they bring in is more the what your paying them then that is a profit to your company.. You'd still record both...

    Depending on how critical they are to your business, a potential buyer may see it as a cost that could be cut and just like if you change broadband suplier becuase one is cheaper or better then the other...

    Your accountant has like put them as revenues costs purely to categorise them, Just like you would categorise Utilities (electric, office rent etc) differently to the other service providers who invoice you..

    The best thing to do is explain in more detail what these freelance "outsourced" guys provide you..

    It maybe that she has done it this way for Tax benefits.
    Last edited by network82; 03-17-2008 at 01:15 PM.
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  3. #3
    Join Date
    Aug 2002
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    Bharat
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    Ask them to raise two separate invoices one for delivery of your services, one for the dev work they do for you.
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  4. #4
    Join Date
    Mar 2004
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    550
    Quote Originally Posted by network82 View Post
    They would still be a Cost to your company because you are invoicing your for a service... But it is still cheaper then not having them on payrol.. Even Payroll counts as a cost or a loss against your profits...

    If the revenue they bring in is more the what your paying them then that is a profit to your company.. You'd still record both...
    This has no effect on profits. Either way, the bottom line would be the same. It's just the "middle line" (gross profit versus operating profit) that I'm asking about.

    Let's say it was just support staff costs as one example. Do companies in the web hosting industry typically record it as a cost of revenue or an expense?

  5. #5
    Join Date
    Jul 2003
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    Goleta, CA
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    Quote Originally Posted by ameeriklane View Post
    I'm curious how companies in this industry are treating staff costs. For example, we have some contract employees who provide customer support and also do system admin on our servers. They work for us full-time, but they are not treated as employees but rather invoice us as contractors (because they are in a different country and it's a lot of trouble to set up a local affiliate there just for 2 people).
    That's generally not ok. There are typically strict guidelines for independent contractors and having them act as full time employees makes them employees usually even if you are treating them as contractors.. Check with a tax accountant to be sure, not really enough information there to give you a definitive answer.

    COGS applies to inventory only. So if you have a service company you generally won't have a COGS account. Buyers only care about COGS for retail, manufacturing etc for you they'll use Net Income to come up with their ratios.

    However, if you do sell some products you will have a COGS account for the inventory outflows that correspond to those transactions.

    The contractor(employee) associated costs should be included with wages or salaries expense.
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  6. #6
    Join Date
    Feb 2001
    Location
    West Michigan, USA
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    Make sure that anyone you hire has their own business set up and have their business invoice your business. That way, its a B2B transaction.

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  7. #7
    Join Date
    Oct 2007
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    The contractors costs are counted as expenses (to be deducted from gross revenues with other expenses to calculate the operating profit). COGS needs to be matched against specific revenues (in the case of inventory for instance that is deducted once a sale is made), with the contractors you can't match anything directly unless they are providing the service directly to your clients and you get paid at that time.
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