How Can I Improve My Cost of Goods Sold and Expenses?

In the FAQ‘s called “How Can I Improve Sales”, “How Can I Improve My Close Rate”, “How Can I Improve My Average Sale”, and “How Can I Improve Sales Per Period”, we discussed The Way to Wealth Formulas. As a franchise owner, those are levers you can pull to get more customers and increase top-line revenues. Now let’s talk about other ways to improve the bottom line too.

Q. In our other discussions, we talked about getting more customers, selling them more each time they buy, and getting them to buy more often to increase sales. How can I make the maximum profit on those revenues?

A. That part of The Way to Wealth formula looks like this:

# Of Customers X Average Sale X Sales Per Period = Revenue

Revenue – Cost of Goods Sold = Gross Profit

Gross Profit – Operating Expenses = Net Profit

Given a certain amount of sales for your franchise (see the other FAQ’s for tips on growing your revenues), the only way to improve Net Profit is to reduce the Cost of Goods Sold and Operating Expenses.

Q. What are “Cost of Goods Sold” and “Operating Expenses”?

A. Cost of Goods Sold (COGS) are the direct costs of selling a particular product or service. The costs to manufacture, buy, store, market, sell, ship, insure, and cover breakage, loss, and returns for that specific product are all part of COGS.

Operating Expenses (OE) are the indirect costs attributable to running your entire franchise, not just to specific products. Salaries, rent, telephones, utilities, advertising, royalties, etc., all add to your Operating Expenses.

Q. How do I decide whether expenses are COGS or OE?

A. Your accountant is the expert in this area. Most expenses clearly belong in one category or the other. Depending on your industry and accounting standards, a few may be categorized differently from other businesses. The important thing is to seek your accountant’s advice, and then be consistent in how every expense is categorized.

Q. Okay, I understand COGS and OE and how they’re categorized. But how do I control them – or better yet, reduce them?

A. This is the critical question! There are many specific actions you can take.

Leverage the tools of your franchisor. They should have tons of data for COGS and OE – for their franchisees and for the industry. Compare your franchise to these benchmarks. Analyze them closely. Where are you out of line? Where and how can you improve against those benchmarks? What would it take to be better than the benchmarks?
Leverage industry tools. Your accountant, business coach, trade association, and online benchmarking resources can help you see how your costs stack up against similar businesses.
Analyze your processes. Which steps add to quality, efficiency, and sales? Which ones get in the way? Which ones just cost money and add no value? Where are there waste, scrap, shrinkage, and theft?
Analyze your staff. What are the common characteristics of high performers? Replicate those things: hire the right people; train them; equip them; measure results; reward performance.
Analyze your employee expenses. Benchmark salaries and benefits against your industry and geography. Pay commissions, bonuses, or piece-work to reward results.
Create or change inventory systems to reduce carrying costs.
Review every supplier, service, and vendor. How and where can you save? Shop competitors. Combine multiple purchases with a single vendor and insist on price reductions. Renegotiate lease and vendor terms and prices. Make it yourself instead of buying it, or vice-versa. Reduce packaging or find it cheaper.
Create a Loss Control program focused on reducing theft and waste.
Create a Safety program focused on increasing customer and employee well being, reducing insurance and legal costs. Work with your insurance company to reduce time lost, injuries, claims – and premiums.
Implement procedures to reduce energy use.
Ask your employees how to save money. Set goals for expense savings. Reward staff for it with recognition, during performance reviews, with salaries, by sharing the savings – or all of the above.
Set SMART goals (Specific, Measurable, Aligned, Realistic, Time-Bound) for your most critical expenses. Create action plans to achieve those goals.
Review your loans and credit cards, talk with your bank about consolidation, call your credit card company and request them to drop your annual fees or change your interest rates, or get a different card.

The Bottom Line of your Bottom Line is this:

Measure every expense
Have a process and controls in place to know expenses on-demand
Create SMART goals
Make expense control a part of your culture and processes
Use your franchisor’s resources
Regularly review every expense for potential improvement
Hire right, train, equip, measure, and reward results
Practice Zero-Based Thinking: “If I knew then what I know now, would I do the same thing?” If not … CHANGE IT.
Time is ticking, and money is there to be saved, but only if you act.
ACT NOW!