It is no secret that retail businesses can be affected by the cost of goods sold (COGS). Retailers often consider COGS to be one of their largest expenses. But what is COGS? And how can business owners reduce it?
What’s COGS?
COGS is a topic that’s been discussed a lot in business circles. But what exactly does it mean? The direct costs of producing a product or service are called the cost of goods sold (COGS). This includes labor and overhead costs.
COGS, or the cost of goods and services, is the total cost involved in making a product/service. Understanding and managing COGS is crucial for businesses to be profitable.
How to Calculate COGS
It is simple:
COGS = Direct Materials + Direct Labor + Overhead
You will need to keep track of all three components to get a complete picture of your COGS. Let’s take a closer view of each.
- Direct Materials
Direct materials are the raw materials used in making a product. This could be anything, from fabric to computer chips. It is essential to track your material costs if you are selling physical goods.
Add up all the materials that went into making your products to calculate your direct material cost. Let’s take, for example, a clothing business that sells 100 shirts at $10 each. You pay $5 for the materials to make these shirts. Your total material cost would then be $500 (or $5 x 100).
- Direct Labor
Direct labor costs refer to wages that are paid to employees directly involved in the production or delivery of a product/service. These are the people making things happen.
Add up all wages paid to employees directly involved in production to calculate your labor costs. Let’s take, for example, 10 workers who work in your factory. Each one earns $10 an hour. The direct labor cost total would be $1,000 (10 x 10).
- Overhead
All indirect costs that are associated with running a business, such as overhead costs, are called overhead costs. These include rent, utilities, and insurance.
Add up all indirect costs over a period to calculate overhead costs. Let’s take, for example, a monthly overhead cost of $2,000. For example, let’s say your monthly overhead costs are $2,000. The total overhead cost for the year would be $24,000 (2,000 x 12).
We’ve covered the basics of COGS. Let’s now look at how it can affect your business.
Profitability and COGS
Because your profitability directly depends on your COGS, it is crucial to understand. Simply put, the lower your COGS is, the greater your profit. Conversely, the lower your COGS is, the more profit you’ll make.
Let’s take, for example, 100 shirts selling at $10 each. Your COGS is $8 per shirt. Your total COGS would reach $800, and your profit would be $200 (between $1,000 and $800).
Let’s suppose you sell 100 identical shirts at $10 each. However, your COGS for this shirt is $9. Your COGS total would be $900, and your profit total would be $100 (between $1,000 and $900).
You can see that even a tiny change in your COGS can make a huge difference to your profitability. It’s important to monitor your costs and ensure they are as low as possible.
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How to Lower COGS
There are many ways to lower the cost of goods for your retail business. You can reduce your COGS by negotiating with suppliers and streamlining your business operations. This will help you improve your profitability and lower your costs.
- Get discounts
A great way to lower your COGS is by taking advantage of supplier discounts. It pays to buy in bulk as many suppliers offer quantity discounts on large orders. Ask about seasonal discounts and other special offers.
- Talk to suppliers
Negotiating with suppliers is another way to lower your COGS. Good relationships with suppliers can lead to better terms such as longer payment terms and lower prices. Asking is always a good idea!
- Streamline your operations
Streamlining your operations can help reduce COGS. You may be racking up unnecessary costs if you still rely on manual processes over automation. Automating key tasks can improve efficiency and decrease waste.
- Reexamine your pricing strategy
It is important to regularly review your pricing strategy. You could be losing sales if your prices are too high. You could also be losing out on sales if you set your prices too high. Consider offering bundles or discounts if you sell products. This will help you to move your inventory faster and lower your overall costs.
- Keep an eye on your expenses.
To find areas where you can make savings, take a look at your expenses regularly. Even tiny savings can add up and make a huge difference in your COGS.
- Make the most of technology.
Many software tools and programs are available to help you cut costs and improve efficiency. These tools and programs can help you save time as well as money.
How Software Tools and Programs Can Reduce COGS?
Streamlining your production process is one of the best ways to reduce COGS. There are many ways to reduce COGS, but the best is to use software programs and tools that automate different tasks.
Let’s take, for example, the manufacturing of widgets by your company. To make a widget ready for sale, there are several steps involved in the widget-manufacturing procedure. These steps could include:
– Ordering raw materials
– Forming and cutting raw materials
– Assembling and assembling the widget
– Test the widget
– Packaging the widget
– Ship the widget to your customer
There are likely to be errors and inefficiencies if you manually complete each step. Software programs can automate many or all these steps and reduce errors. This will allow you to increase production efficiency and decrease the risk of making mistakes.
A more efficient production process generally results in lower COGS. This is because you can produce more widgets in less time, which lowers labor and material costs.
Software programs and tools are not only effective in reducing COGS by increasing efficiency but also provide visibility into your supply chain to help reduce costs. You can identify potential areas in which you may be able to negotiate lower prices with suppliers when you have visibility of your supply chain.
Let’s take, for example, a program that tracks raw material costs. You might find that one type of raw material has been costing you more over time.
This information will allow you to contact your supplier to try to negotiate a lower price. You will often be successful in negotiating a lower price and can reduce your COGS.
Software programs and tools can help you reduce COGS. They provide insights that will help you make better product selections. Let’s take, for example, the possibility that you sell widgets as well as gizmos.
Analyzing your sales data might reveal that widgets sell better than gizmos. You might decide to shift production to widgets to reduce COGS.
How can software tools and programs reduce COGS? They can increase efficiency, provide visibility into the supply chain, and help you make better product selection decisions.
Let’s now look at the impact of these tools and programs on your business’s cost.
What are the Cost Impacts of Implementing Software Products and Tools?
Many factors will affect the cost of any software program or tool. These include your company’s size and complexity. You can expect to spend between a few hundred and a few thousand dollars to get your business started.
You might find low-cost or free options in some cases. In most cases, however, it is worth investing in quality programs or tools that will reduce COGS and increase your bottom line.
There you have it! These are just some of the ways software tools and programs can help reduce COGS. These are great options to lower the cost of goods in your business.
You may be interested in investing in programs or tools to reduce COGS Progressive Business Capital provides funding options for businesses such as small business loans and merchant cash advances, invoicing factoring, business line of credit, fixed-rate loans, and invoice factoring.
To learn more, please feel free to contact us at (800.508-4532) or by email at [email protected].
