How to Increase Profit and Reduce Cost of Goods Sold (2024)

FAQs

How can you reduce the cost of goods sold? ›

There are a number of things that businesses can do to reduce their COGS, such as negotiating better prices with suppliers, improving production efficiency, and reducing waste. By understanding COGS and the ways to reduce it, businesses can make better decisions about pricing, production, and overall business strategy.

Analyze your costs in percentage terms

On the other hand, if your sales volume remains constant, you can increase profits by reducing the cost of a specific item. This way you can strive for two goals: diminishing specific expenses and increasing productivity at the same time.

Last In, First Out (LIFO) is the opposite of FIFO. This refers to the last products added to inventory, which must be sold first. This will lead to higher COGS because as the cost of goods increases, goods with higher costs will sell first and your net income will decrease.

Cost of Goods Sold = Beginning Inventory + Purchased Inventory - Ending Inventory.

During periods of rising prices, goods with higher costs are sold first, leading to a higher COGS amount. Over time, the net income tends to decrease.

Generally speaking, COGS will grow alongside revenue because theoretically, the more products and services sold, the more must be spent for production. While the gross margin is the standard metric used to analyze the direct costs of a company, the COGS margin is the inverse (i.e., one subtracted by gross margin).

Cost of Goods Sold (COGS) measures the “direct cost” incurred in the production of any goods or services. It includes material cost, direct labor cost, and direct factory overheads, and is directly proportional to revenue. As revenue increases, more resources are required to produce the goods or service.

Streamlining operations can prevent delays and their associated costs. The more efficient your processes, the less costs you incur in employee time or excess stock or materials, for example. Look to refine your sales processes and automate recurring tasks to save time and improve accuracy.

What is a COGS pricing strategy? ›

Cost of goods sold, or COGS, tells you what your business spends to deliver a product or service to your customer. It's treated differently to general costs like rent or employee wages. Look for expenses that: occur only when a service or good is provided.

The COGS account is an expense account on the income statement, and it is increased by debits and decreased by credits. Purchases and inventory, since they are asset accounts, are also increased by debits and decreased by credits.

Starting inventory + purchases − ending inventory = cost of goods sold.

If a business purchases a greater portion of raw materials, it may be able to get a better price. This reduces the cost of raw materials per unit produced, driving down the overall cost of goods sold and leading to a higher gross profit.

Elimination: Remove unnecessary products, processes, benefits, and workflows. Optimization: Streamlining processes and workflows to reduce bottlenecks and redundancies. Substitution: Using cheaper products or services. Repurposing: Utilize existing tools, technology, and processes in new, unique ways that meet demands.