Part 2 of the profit triangle this morning.
The other day we talked about how the triangle and profits it's at the top and below it is your sales your cost of goods and then your fixed expenses, and then all the parts that fall below that.
What I wanted to talk about this morning is part 2, is your cost of goods sold.
Cost of goods sold by definition is a cost that you incur because you get a sale.
So it doesn't include things like rent or phone bills or anything like that. They're fixed
expenses that will talk about in part 3.
But the profit triangle so anything that you buy and generally add a margin to and on sell is what goes into your cost of goods sold.
Fundamentally then we need to understand if our cost of goods is in the right percentage in terms of our costs.
Now as part of what I do with the Find Your Cash program, there is a way from us to assess where your cost of goods is and compare it to similar Industries.
So your cost of goods when you take that from your sales gives you your gross profit for the business.
The first thing to do is work out exactly what that number is and then we can go and compare it to the different benchmarks.
Most of the time when I do this exercise with people they are way, too low. They don't have enough markup on the goods they're selling or the sales price is too low and consequently a giving up margin, so the first thing we need to do is get that benchmark sorted.
The next thing we need to do and I talk about this in the book is go back to the people who are our suppliers and renegotiate.
Let's see if we can get a better deal from them.
It's important to recognise that we're in a very competitive market place, so our suppliers
are quite often, prepared to move on some of their pricing particularly if you can find a win-win deal. Whereby they get more of what they want, and you get more of what you want simple strategy to be able to do.
This is instead of buying different bits and pieces from different suppliers. If you are
a bundle it all up and start to get all your business from the one supplier. Go back and ask them what better pricing can we get if we start to buy solely from them.
The other thing to keep in mind here is also with subcontractors and so forth. Are they being super efficient in what they're doing?
Sometimes you need to go back out to the marketplace and see if you
can get better prices elsewhere.
Have a fantastic Friday and enjoy your weekend.