Boost Your Profits: 6 Practical Strategies to Lower Cost of Goods Sold Now

Running a business is no small feat. Between juggling operations, managing employees, and keeping customers happy, the last thing you want is to be bogged down by soaring expenses.

Why? Those sky-high costs can rain on your profitability parade, dragging down your gross profit and potentially putting your business at risk.

But here's the silver lining—reducing your Cost of Goods Sold (COGS) is one of the effective ways to significantly boost your profitability without sacrificing the quality your customers love.

Here are six proven and practical strategies you can start using today to cut your Cost of Goods Sold and boost your business’s profitability:

1. Understanding Margin Pricing

In margin pricing, you use your Cost of Goods Sold to determine how much you should charge your customers to attain your desired profit margin.

Picture this: If it costs you $175 to produce your product ($100 for materials and $75 for labor). If you want a 35% profit on each unit, don’t just multiply $175 by 1.35. Instead, divide $175 by 1 minus the margin percentage (0.35 in this case), so $175 / 0.65 = $269.23. This ensures your selling price provides a 35% profit margin.

2. Audit Your Current Suppliers and Vendors

Regularly reviewing and renegotiating with your suppliers and vendors can lead to considerable cost savings. Ensuring you receive the best possible terms can directly impact your profitability.

Tips:

• Negotiate Better Terms: Always ask for discounts, better financing terms, or additional perks like prepaid freight.

• Explore Alternatives: Always research competitors and compare their offerings. Even if you prefer sticking with your current supplier, competitor quotes can be used to negotiate better terms with them.

3. Confront Supplier Price Increases

Small, incremental price increases from suppliers can significantly impact your bottom line. How do you keep these increases under control?

Explore other suppliers who might offer attractive discounts. Share these new quotes with your current supplier—they'll appreciate the opportunity to match the offer and maintain your strong relationship.

Suppliers value loyal clients, and by presenting competitive pricing, you might even secure a long-term rate guarantee, providing you with stability and peace of mind.

4. Keep Your Returns in Check

Returns are a quiet nemesis, silently biting into your profits. Returns not only lead to direct loss of revenue but also increase handling and restocking costs.

That is why efficient management can prevent unnecessary costs, strengthen your quality control processes, and most importantly improve customer satisfaction which builds customer loyalty!

Here’s how to keep them in check:

• Enhance Employee Training: Equip your team with comprehensive training programs to ensure they handle products flawlessly, reducing the chances of returns due to errors.

• Strengthen Quality Control: Develop thorough quality control processes that catch defects early, ensuring only top-quality products reach your customers.

• Supplier Partnerships:  Work with suppliers to negotiate returns and secure credits for defective parts. If the problem persists, investigate alternate suppliers.

5. Reduce Scrap

Scrap represents more than just "waste". It's a direct loss of valuable materials, labor, and potential sales.  By effectively managing and reducing scrap, you can realize substantial savings and improve efficiency.

Solutions:

• Defective Tools/Processes: Regularly inspect tools and processes to identify and rectify root causes of scrap.

• Training: Ensure employees are well-trained and motivated to perform their tasks efficiently.

• Recycle: Recycling or reworking scrap materials can help offset costs and reduce waste, turning potential losses into valuable resources.

  
  

6. Limit Excess Inventory

Excess inventory is like money gathering dust. It ties up capital and adds unnecessary storage costs, limiting your business’ flexibility.

In short, cutting down on excess inventory frees up cash flow and allows for more efficient operations.

Tips to streamline your inventory:

• Implement systems to track inventory levels accurately and predict demand.

• Adopt the “Just-in-Time” production method to ensure you only produce or order what’s needed, minimizing excess inventory and cutting down on storage costs.

The Bottom Line is...

Reducing your Cost of Goods Sold is a strategic process that demands thorough audits, effective negotiation, and continuous process improvement. Implementing these six strategies I've shared can lead to noticeable gains in profitability.

Take action now and position your business for greater profitability!

If you want to master more ways to reveal and capitalize on the hidden profits in your business, download my FREE eBook, 'Hidden Profits: 12 Proven Strategies to Increase Your Business Profits.'

In this eBook, you'll find in-depth, practical tips—11 more effective profit and revenue growth strategies, to keep more money in your pocket!

Scan here to download and start making a difference in your business profits today!