It is very important to understand that the Cost of Sales has a direct impact on generating your business revenue.
The cost of sales includes direct purchases in producing goods that your business sells.
During production, the cost of sales includes,
- Materials
- Labor cost
- Wholesale Products
- Delivery
- Packaging Costs
In simple words, the things that are directly related to the production or manufacturing and delivery come under the cost of sales.
Understanding the cost of sales?
The cost of sales doesn’t include
- Marketing
- Sales
- Commission
- SalariesThese all are other expenses when manufacturing products aren’t directly related to the process. These come under variable costs.
Beginning Inventory +Raw Material Purchase + Cost of Direct Labor + Overhead Manufacturing Cost – Ending Inventory
For Example:
If a manufacturing company had a $10,000 cost of inventory at
At the beginning of the year, the company spent another $50,000 in the purchase of raw materials and other inventory items then ended with an inventory cost of $9,000. During the year manufacturing cost is $40,000 and total labor cost is $30,000 respectively.
The total cost of sales would be,
Beginning Inventory +Raw Material Purchase + Cost of Direct Labor + Overhead Manufacturing Cost – Ending Inventory
Beginning inventory = $10,000
Raw Material Purchase = $50,000
total labor cost = $30,000
Overhead Manufacturing Cost = $40,000
ending inventory = $9,000
Cost of Sales = $10,000+$50,000+$30,000+$40,000-$9,000
Cost of Sales = $121,000
Effective Ways to Reduce Cost of Sales:
There are many ways you can reduce the cost of sales.
The best way to reduce the cost of sales is by recognizing the necessary and unnecessary expenses.
Reducing cost and developing quality methods is time-consuming but you must take necessary action for the growth of your business.
Here are some of the effective ways:
Modernize marketing efforts with affordable tools
Are you spending much money on traditional marketing methods but still not getting enough visibility? It means you need to cut that expense.
Try using digital marketing methods, and make your social media presence it will boost your sales at an effective cost.
Though traditional marketing methods are effective they are much more expensive compared to digital marketing.
Also, you can track your business performance by digital marketing. Use popular social media platforms like Facebook, Instagram, Twitter, Linkedin, Snapchat, etc.
Note: Analyze which platforms best suit your business and enhance your online presence.
1. Go Paperless
Many will think that the price of paper, ink, and postage is minimal, but with this, there is a problem of huge cash flow. Reduce these types of recurring costs by going paperless.
Instead of dealing with tons of paperwork, it is better to switch to digital bill payments, invoices. This will help you to organize all your important paperwork and if needed you can find it easily.
2. Create a Budget
When it comes to budget if you are not aware of certain things then your business will not sustain in the long run.
If you don’t have a proper budget list you will end up increasing your business costs. Creating a budget list will help you reduce your business’s cost.
Avoid budget-related mistakes and make smart decisions by having a clear idea.
3. Go Digital
You can save a lot of fuel costs by conducting meetings and can handle tons of routine business matters without driving somewhere. COVID-19 taught us that we can take care of the business with just a phone call. Technology will have a major influence on your business’s future. Use it effectively.
4. Build a Strategy
When your ultimate goal is to maximize return on investment (ROI) your business needs an effective strategy. If you want to reduce your sales cost you should save money and strive to increase your profit.
5. Prioritize Quality Over Quantity
Cost and Revenue are the most important factors in determining your business success. You can have high revenue but if your business costs are higher it will show no profit.
Many business owners attempt to decrease costs and increase their profits. However,
ensuring quality over quantity is crucial.
Final Thoughts :
Your business might be in the startup phase or at a well-established level. Try implementing each one of these strategies to reduce costs.
You will see a huge change in the cost-efficiency of your business.