Profit Growth Tip – Understand your Cost of Sales

Do you know how much it costs you to produce each product or service in your range?

The better you can understand this cost of sales – or cost of goods sold (COGS), as it’s more commonly known – the more ability you have to control your company’s profitability. When you know your COGS, you can set the right price point, control your profit margins and ensure that you’re maximising your gross profit.

But to do this, you need to understand cost of sales and how it impacts on your financial management.

Understanding your cost of sales

To take one of your company’s products or services from inception to delivery, you will incur a number of costs. For example, if you’re a manufacturing business, these costs might include buying in raw materials, direct labour costs, the overheads for running the machinery in your factory, the costs of delivering the products and the sales and marketing expenses needed to sell the product to your target customers.

For a café, the price of a coffee is your revenue and the cost of the coffee beans and all the costs that go into making the coffee are the cost of sales. The profit margin is therefore revenue minus cost of sales.

If you are able to attribute your cost of sales to the revenue components you give your business a huge tool in being able to analyse the profitability of your product or services. This level of information is invaluable in understanding what is profitable or more profitable. This can drive what you focus and changes you make to how you do business.

Reducing your cost of sales to boost gross profits

The more sales you make at a given price, the higher your revenue (income) will be. Deducting your cost of sales number from your revenue figure gives you your gross profit – and gross profit is a key metric for tracking the health and profitability of your business.

A high cost of sales number reduces the size of your profit margin. And, in turn, a small margin will start to have a negative impact on your gross profit. Being able to control and manage your cost of sales, and its impact on your gross profit, is a vital skill for any product-based business.

Here are some ideas for improving the profit impact of your cost of sales:

  • Reduce your supplier costs – If you can reduce the size of the purchases made to produce your goods, that means less expenditure and less impact on your profit margins. Try shopping around for cheaper suppliers, or negotiating better prices with your existing suppliers to bring down costs.
  • Streamline your production process – the more complex your production process is, the more overheads and production expenses there will be. Taking a lean approach helps you to continually evolve your processes and remove the extraneous elements – cutting costs while still delivering a quality product.
  • Increase your prices to boost your margins – if your cost of sales number is eating into your profit margin, one way to resolve this is to increase your price point. This will help to increase income and boost your margin but does require caution. If prices get too high, this can damage existing customer relationships and make you uncompetitive in the market – so think carefully about any price increases before taking action.

Talk to us about improving your gross profit

One of the key challenges businesses face is not producing business performance data real time and another is not correctly categorising cost of sales in the records so gross profit is not visible. These are things we excel at.

Get in touch to if you want to boost your gross profit and get cost of sales under control.

By Chidi

Virtual Focus Accountants

Tech focused Accountants our clients trust