One item that can be imperative to your success in business is your cost of sales (COS). So can this figure be improved upon? Absolutely, you just need to work with what you have. Your business type will influence which approach you take for this component of the profit and loss.
Cost of sales for retailers with products
Let’s assume that your cost of sales is normally 50%, 60% or 70% of sales. How can you improve this? A few examples come to mind:
Buy in bulk for supplier discounts
Depending on the type of product you stock, this may not be an option. If you stock perishables, you need to consider this option carefully based on other factors such as the ability to sell before the use by date
Negotiate pricing with your suppliers for a lower cost (particularly if you have many distributors for the same product)
I recommend reviewing this each year, even if you do not have many distributors. You would be surprised what you are able to negotiate!
Play distributors off against each other. If you prefer working with one, get prices from others and ask to match
Take advantage of seasonal supplier discounting
Some stock items have a seasonal life, for example fashion or homewares. Wholesalers who are still holding stock towards the end of a season will discount heavily to move the surplus stock. If purchased, these savings can then be passed onto the consumer by giving the same discount but still maintaining the margin you normally have. You could sell the item at normal price, but as it is a seasonal item it is often more prudent to pass on your savings to increase volume of sales.
Increase your sales price, thus decreasing the COS % of sales
But we have a Recommended Retail price (RRP) I hear you say! That’s okay but how about adding a small amount such as $1 to your items? When you think of the volume of items that you sell, this can be worth a significant amount of money. Remember that the extra $1 has not cost you anything at all and is pure gross profit. If $1 is too much, why not make it $0.50? Or for those of you who can go higher, try adding $2 to $3 and go lesser on other products that are more price sensitive. You would be surprised – not all consumers are price driven, most are willing to pay a little more for convenience and service.
Reduce wastage
This can be quite a large factor for the hospitality industry. A cafe/restaurant is not only made by the margins they have but also their ability to purchase extremely efficiently and minimise and/or eliminate wastage. Often it is about educating staff to ensure they are aware of the costs (and thus lost profits) of every perishable item that is potentially wasted. This alone can be a major component of the COS of some cafes/restaurants. A lot of the time, this wastage is not being tracked and thus owners are unaware of the impact this is having on their business. Tracking this and its costs can provide the owners with extremely useful information to improve their COS.
You can use one or several of the above ideas, depending on your business or industry type.
Cost of sales for a manufacturer
These can be reduced in a few ways. Often efficiencies have a part to play. Some examples include:
- Negotiating a better deal with your factory
- Doing larger production runs (if plausible) to decrease per unit cost
- Working with the factory to improve efficiencies within the production run to decrease per unit cost
- Transferring production offshore (whether we like it or not, this is a more viable option for most manufacturers)
Cost of sales – services
For those of you in the service industry, cost of sales (in its traditional sense) is not normally a large component of your business, but depending on your structure it can be. Some ways to reduce cost of sales include:
- Negotiating contracts with subcontractors
- Implementing and improving systems to ensure that every dollar of subcontractor expense is utilised to its most efficient level
- Transferring the services work offshore. Again, this is not something I necessarily agree with, but there is no doubt it does improve margins for the services based industry. Even the accounting industry is getting involved with this (don’t worry I’m not planning on it and you may want to ask your accountant to make sure they’re not either!)
