When building a financial model for a startup, it’s crucial to accurately forecast the Cost of Goods Sold (COGS). Not only will investors focus on the profitability of delivering revenue, you, as a founder, should care deeply about how much of the company’s revenue creates gross profit, which is used to fund the rest of the business’ activities.For product-based startups, forecasting COGS involves calculating direct material, labor, and overhead costs, considering economies of scale and vendor relations, and accounting for inventory management. Software and SaaS startups, on the other hand, should focus on server and infrastructure costs, third-party services, support staff, and possibly allocate a portion of development costs to COGS, reflecting the direct costs of service delivery.In any financial model, COGS forecasting should be based on historical data, align with industry benchmarks, and be adaptable to changing business conditions. Regular updates and variance analysis are vital for maintaining accuracy. Understanding the relationship between COGS, pricing strategies, and cash flow is essential, especially for startups looking to scale. An accurate COGS forecast not only informs pricing but also provides investors with a clear picture of operational efficiency and potential profitability.