Is your cost of sales affecting your gross profit?

How much does it cost you to produce your product(s)?

The better you understand your cost of sales, or cost of goods sold (COGS) as it’s more commonly known, the better control you have of your company’s profit margin. Once you know your COGS, you’re able to set the right price point, get good profit margins, and know you’re maximising your gross profit.

However, in order to do this, you need to understand your COGS and the impact this has on your finances.

Knowing your COGS

Each product your company takes from inception to delivery, incurs a number of costs along the way. For example, a manufacturing businesses costs may include raw materials, labour costs, overheads, delivery costs, as well as sales and marketing expenses for each product they manufacture. These are all necessary costs and are the direct costs to produce your product for sale.

To calculate your COGS number for a time period, take the value of opening stock (inventory), add the costs from producing the goods, and then minus the value of the closing stock balance.

The COGS formula looks like this:

Opening Stock + Purchases – Closing Stock = COGS

For example, if you started with an opening stock/inventory of $10,000, your COGS calculation would be:

Opening Stock: $10,000 + Purchases: $25,000 – Closing Stock: $8,000 = COGS: $27,000

Reducing COGS to boost profit

The more sales you make, the higher your income will be. Deducting your COGS number from your income figure will give you the gross profit figure. Tracking gross profit is key to the health and profitability of your business.

If your COGS cost is high, this will reduce your profit margin. A small margin will start to have a negative effect on your gross profit. Controlling and managing your COGS, and in turn your gross profit, is vital for any product-based business.

Here are some ways to improve the profit margin of your COGS:

  • Reduce supplier costs – If you can reduce the cost of the purchases made to produce your goods, that means less expenditure and a positive impact on profit margins. See if you can find a cheaper supplier or negotiate bulk pricing with your existing suppliers to help bring down costs.
  • Streamline the production process – the more complex your production process is, the more overheads and production expenses there will be. Streamlining the process helps you to remove unnecessary processes and if you follow a lean approach you will continually evolve your processes. This cuts costs while still delivering a quality product.
  • Increase prices to boost your profit margins – if your COGS is eating into your profit margin, you may need to increase your price point. This will increase both income and your profit margins but if prices get too high, you will put off existing customer relationships and it may make you uncompetitive in the market. Think carefully about any price increases to ensure you’re remaining competitive.

Talk to us about improving your gross profit

If you want to boost your gross profit and get COGS under control, come and have a chat with us. We’ll look for opportunities to reduce your goods-related purchases and push for a better profit margin on your products.