USA COGs vs. OPEX

[fleetyweety]

I have a live streaming company where users live stream on the website, and we generate ad revenue by running commercials during the streams. We pay the live streamer a revenue share we generate from ads and classify that as COGs.

I am starting a new referral program where if one streamer refers someone to start streaming on the website, then they will earn a percentage of the revenue share that the referee generates for a specified amount of months. Is this fee COGs or OPEX/Commissions? What considerations do I need to have to make the determination?

 

[DrStrangeLove]

First, all the expenses you've described are operating expenses. They arise out of your business's operations, so they're operating expenses.

Second, neither kind of revenue share is COGS (Cost of Goods Sold), because you are not selling inventoriable goods. COGS is part of the flow of the Inventory account, and Inventory represents a store of capital. In contrast, your platform sells a service--the use of bandwidth on your platform. You can't sell Thursday the streaming time and bandwidth you didn't sell on Monday. What you don't sell on Monday is lost forever. Since you can't store the use of your platform for sale later, you're not selling inventoriable goods. So you can't use COGS to represent the sale of your service.

Third, the commission structure you described isn't overhead expense (I think that's what you meant in place of operating expense). It's a cost directly related to the revenue that comes in. (You mentioned a percentage of revenue the referee brings in, and a revenue share of direct revenue produced by the streamer.) You'd still deduct your commissions paid from your revenue to get to your gross margin, particularly if it's a percentage of revenue.