# Gross Profit Margin



## out da box (May 1, 2007)

I am struggling to get my COGS down below 30%. In this I include outsourcing, inventory/blank goods and supplies. 
We do heat transfers, screen printing, and vehicle graphics/banners/signs. I want to be as close to 25% as possible. Last month it was 36%. Some as high as 45%.
Can I pick a brain?


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## BWD (Mar 8, 2009)

Not sure how you buy supplies and stuff and I m just thinking of things that come to my mind immediately. Are you buying supplies like vinyl and that in bulk?. I ask only because when I was buying my shirt vinyl, I was buying originally only what I needed at the moment. A yard here and a yard there, once I started buying 5 or 10 yards at a time, my cost of goods did go down. A bit here and a bit there all adds up.

Of course, if you are already doing that, then my point is pretty moot lol


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## losille (Nov 4, 2008)

1. Compact your product line. (More inventory equals more purchases of small lots.) Limit your self to the most profitable items. 
2. Buy larger quantities.
3. Negotiate quantity prices. Ask about contracts where you agree to buy a certain number of goods over a year.
4. If you include shipping prices in your COGS, trying talking to your suppliers about splitting the cost.
5. Find other companies in your area that use some of the same products and start a mini coop. Two business have more buying power than one. 
6. Times are getting tough for suppliers, talk to the sells reps and find out what is going on in the company.
Work up sells projections then take advantage of sells and promotions by buying more.
7. Keep accurate, accurate, accurate records of wastage. Then look for areas of waste. Make sure you recapture paint and nothing you can reuse gets thrown away. Keep this quote on your mind, "Watch the pennies and the dollars will look out for themselves." 

8. Outsourcing, always keep your eye out for competitive prices. If you can get it some where else for less allow the current company to meet the price. Here is another opportunity to do a sales projection, sign a contract for a certain number of items over the year. Your supplier can purchase larger quantities and pass some of the savings along to you.

9. The months that have a very high cost of goods sold analyze what you sold, where you purchased the items and what was your wastage. 
The months that are low do the same.
Compare the two. 
This will help you see your profitable items and where your expenses are out of control.

If you absolutely cannot cut your expenses then you need to raise the price.


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## out da box (May 1, 2007)

I'm looking over my numbers and It's hard trying to find leaks.
I'm trying to build up some stock and inventory now, but it's running my cogs through the roof.


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## losille (Nov 4, 2008)

How are you computing your COGS?

The new inventory shouldn't skew the COGS but it will change the cost of inventory for the month.


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## Dan K (Nov 15, 2006)

I don't think that supplies should be counted as COGS. We're solely screen printers, this may be different for signs and whatnot, but the only COGS we record are garments, inks, and production labor. Stuff like emulsion, screen wash, and everything else down in the shop that is not the shirt or that becomes a part of the shirt that is resold, is a shop supply expense.

Check out your invoices from your vendors... For instance, if we buy screen wash and emulsion from SPR, those items are taxable upon sale to us as we are the end user. If we buy water based ink from them, since it is a COG, they do not charge us sales tax since we are charging sales tax at the later point of resale.

A couple of accountants have explained it to me this way, but after I started asking the vendors and distributors whom we buy from why they tax the things that they tax, their explanation backed up and helped me realize that the only true COGS would be the shirt or what is attached to the shirt during your production process - inks, rhinestones, heat transfer paper, etc.


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## out da box (May 1, 2007)

Even so, the cost of inputs to my overall system is at the 30% or higher level. I think for the year in '08 it was 29.9% combined true cogs and supplies and outsourcing and shipping, etc.
Looking at it the way you put it Dan, I may not be doing too bad percentage wise.
I guess what I'm after is what's your magic number for growth.


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## BillyV (May 8, 2009)

a 30% cost factor is not bad at all.


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## out da box (May 1, 2007)

Well not a 30% margin, but a 30 percent cost of input material and associated costs of production.


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## Liberty (Jul 18, 2006)

Uh, raise your prices? Two sides to every coin.


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## Dan K (Nov 15, 2006)

out da box said:


> Looking at it the way you put it Dan, I may not be doing too bad percentage wise.
> I guess what I'm after is what's your magic number for growth.


From what it sounds, you are doing pretty good. Once you recalculate your COGS, what does your margin look like?

I've heard it said and read it written, that (with t shirts) you want to make $1 for every $1 you spend on COGS. Obviously you have to factor in the complexity of the jobs and balance them, and your other profit points in your business (signs, embroidery). You shouldn't make as much money on 5000 1 color 1 location prints as you should on 100 prints with 4 colors in two locations. Balancing that is great, and watching your margins weekly, then monthly, then quarterly, then annually is essential I think. We run between a 50 and 60% margin consistently with the way we calculate COGS. If you manage your COGS which is your biggest output and keep that margin stable, then you switch your focus to your expenses. Managing your expenses is where you find the most control and where you can really realize the financial results of getting them down, which are your profits. If you consider your COGS and margins fixed, then go full bore at reducing your expenses, it will be realized in your profits...

Can you use less supplies, can you reuse supplies, can you turn off more lights, is your equipment running all day, or to you leave it off until a certain time in the morning while you do prep, then turn the equip on and run it for 6 hours instead of 8, can you find a less expensive insurance policy, can you renegotiate shipping rates, can you get a less expensive landline or cell phone service, etc. There are LOTS of opportunities to reduce expenses when your COGS are more rigid and fixed.

Oh yes, one very important factor I forgot to mention is labor. Make sure to distinguish between your production labor and administrative labor. I feel kinda dumb for not mentioning it before, but your shop/production labor is a COG too. So in our shop, our COGS are garments, inks, and two peoples salaries. We have two admin people, and those salaries are administrative expenses.

I guess I should also state, that I am no pro, I am not formally educated, and have only been doing this stuff for 6 years, so these are my thoughts and opinions, I could very well be wrong, I could be a little off, and there are certainly more people out there who know way more than I do about this stuff. I fully enjoy the conversation though...

There is a killer series of books out there by Harvard Business Review. Check them out if you have the time. The package from HBR was like $150, I got all three books on Amazon for around $45. The books are:

Amazon.com: Finance for Managers (Harvard Business Essentials): Harvard Business School Press: Books

Amazon.com: Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean: Karen Berman, Joe Knight, John Case: Books

Amazon.com: Ahead of the Curve: A Commonsense Guide to Forecasting Business and Market Cycles: Joseph H. Ellis: Books

The first two are awesome. The third one (Ahead of the Curve) is also awesome, but more about watching the large economic environment and applying that to your business, while the first two are written in laymans terms and are more about how to read and understand your business finances, income statements, and balance sheets.


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## BWD (Mar 8, 2009)

For someone who isn't a "pro" or formally educated, that was very well written Dan. And more to the point, extremely good advice. Knew there was a reason this forum does so well and helps out so many.


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## out da box (May 1, 2007)

Dan you're a beast. I've got way too many irons in the fire today, can't post, but I'm gonna re-read your post when I get home. Thanks.


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## BillyV (May 8, 2009)

Dan,
I think you are right on target!
Thanks for the great advice!


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## Dan K (Nov 15, 2006)

Well thank you guys all so much for your good words! I very much appreciate it.


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## out da box (May 1, 2007)

Expenses and supplies especially, that's where my money goes. Dang-gum Ebay!!!


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## losille (Nov 4, 2008)

It is very easy to lose track of spending with small items.

We decide on a price markup based on all expenses. First we find out how much it cost to produce one shirt. 

You group expenses by type and I will not be adding in equipment depreciation cause it is difficult to find.

THIS IS WAY OVER SIMPLIFIED

We take inventory on the first day of each month then find the $amount for each category. 
$beg inv +$purchases-$ending inventory=$amount
Shirt production $2000
Labor and salaries paid 1000
General supplies 100
Janitorial supplies 50 
Office supplies 10
Insurance 120
Rent for one month 200
Advertising 80
Utilities 300


If you have the actual amounts add them up otherwise do a projection of expenses. 

Divide total expenses by units sold (or expect to sell)

This will give you actual cost per shirt. Say $10 
Then add your mark up percentage. 

At the end of each month look at your controllable expenses. If you aren't where you want to be profit wise.

Attack your controllable expenses first. 
labor, utilities, advertising, etc and if you absolutely can't cut any closer to the bone raise your prices. Or decide if your markup is realistic.


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## wormil (Jan 7, 2008)

My criteria for approving out of the ordinary expenditures that cannot be billed to a specific job:
1. can I sell it?
2. have my customers asked for it?
3. will it increase productivity?

This is basically for new products and one off expenditures (basic supplies exempted). So for example, I see a new drying rack and consider buying it... 1. no, 2. no, 3. maybe... this is where you have to be honest. Do I just _want _a new drying rack or do _we need_ a new drying rack? If the last answer comes up _no_, then I'm not spending the money. The employees want me to buy pizza for lunch... 1. no, 2. no, 3. maybe... Do I need them to work through lunch?


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## Dan K (Nov 15, 2006)

Hey Ridgely, I just got an email from Impressions with a link to this article, which is really good and right in line with your thread here. Check it out:

Off the Cuff: How to Measure Key Barometers of Business Health — Part 1 of a Two-Part Series


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## out da box (May 1, 2007)

What percentage of gross screenprinting sales do you guys spend on film, emulsion, screens, ink, etc.
My sign and vinyl supplies are high and are skewing my overall numbers, but still I'm curious.


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