Assessing these three types of costs annually could help you get a better idea of what it’ll take to increase your profit margins going forward.
Is what you sold this year as profitable as it was last year? Surely it had to be. You sold the same stuff.
Yet, perhaps not.
An annual review of your profit margins could keep your company from falling into a slow, potentially hidden spiral of loss. By reviewing whether what you sold this year was as profitable as it was last year, you can make adjustments for the year ahead and price your goods and services accordingly.
Before we begin, it’s always smart to have a reliable financial partner like a CPA, accountant or bookkeeper who’s proficient with tracking profit. Use the points below to start a conversation with one of these professionals so you have a trusted, ongoing partner in your pricing and business success.
Let’s take a look at where you should focus your annual review, including the components that are often forgotten when it comes to profitability.
Production Costs
The easiest question to ask for any company that sells physical goods is, “What did it cost us to make this or have someone make it for us?”
But what did it cost you to make what you sell?
Production costs are the per-unit cost of each good plus shipping to your inventory location. The easiest way to assess this is to have your bookkeeper or accountant review all invoices from your vendors for the year. They should be tracking these in your financial reporting. Have them run a comparison of costs from this year to last year.
Now you have a production costs number and you know whether it went up, went down or stayed the same.
Inventory Costs
Have you transformed your garage into a warehouse? Did you upgrade to a bigger office or warehouse space this year?
It costs money to keep your product on shelves. A previous mentor of mine not-so-lovingly referred to inventory as “dollar bills sitting on shelves.” How many dollar bills did your business have sitting on shelves this year?
“By reviewing whether what you sold this year was as profitable as it was last year, you can make adjustments for the year ahead and price your goods and services accordingly.”
From wherever and however you’re fulfilling your orders—even if it’s a physical storefront—you have inventory costs. Get these numbers from last year and this year and see what’s what.
Curious things you might find here include a rush in orders, resulting in rush fees paid to your production vendors so you could fulfill orders in a timely fashion. While your cost per unit and inventory costs might not have gone up, you might have paid more in rush fees and fulfillment costs, putting a dent in your bottom line.
Fulfillment Costs
If you’re operating in a brick-and-mortar environment, you might not think a lot about fulfillment costs. But you should if you switched vendors for your shopping bags this year.
If you do a majority of your business via wholesale or online orders, there can be multiple moving parts to your fulfillment costs.
First, you have to know what in-house fulfillment truly costs you, from manpower to packaging and shipping. How much are boxes and shipping containers? How much does packaging cost? Are you using the best box (read: smaller and right-sized) or the most convenient box (read: larger or cheaper and filled with lots of costly packing material)? What did you pay in shipping costs this year versus last?
Yes, it can be a long list when it comes to fulfillment. But it may be easy to overlook places for comparison. You might find that a slightly more expensive and right-sized box can save you thousands a year in packing materials and, subsequently, thousands a year in shipping costs due to lower weights.
If you’re not considering opportunities to increase your profit margin by assessing the components that go into fulfillment costs, you may be leaving even more dollar bills sitting on shelves than in your bank account.
Some Opportunities for Increasing Profit Margin
Now that you’re thinking of all the reports you need to get from your financial pro come year-end, how about we look at some areas where you can make better move-forward pricing decisions?
Consider a fulfillment service as an alternative to warehousing and fulfilling your merchandise. Set your financial pro on exploring those like a bird dog and see if there are cost savings to be had that can free up in-company manpower.
And make sure that a pricing and profitability review is regular business for your business. If your current financial professional doesn’t know how to provide you with this information, find a business-savvy financial partner who can. You can’t adjust pricing if you don’t know it’s needed. Better to have the data that lets you ask the better questions than simply hope you’re coming out ahead.
Author: Erika Napoletano
Columnist, American Express OPEN
