5 Best Practices for Determining the True Cost of Goods Sold for Manufacturers

Nick Roell

Jul 10, 2024

Manufacturing businesses typically operate on narrow margins, complicated by inventory challenges and material costs over which they have little control.

It’s an environment in which a thorough understanding of the true cost of the products you manufacture is key to your ability to stay competitive and prevent costly oversights.

Here are five best practices for taking a wider view of your cost of goods sold (COGS) for better management of the things you can control.

1. Prioritize Inventory Management

The ideal inventory strategy, as every business owner knows, is the perfect alignment of never having more inventory than you need to make goods for sales that are already under contract – the so-called “just-in-time” (JIT) method.

In the real world of manufacturing, you can wait months for the raw materials you need to arrive from across the world. What you can control: financial reporting that provides visibility and analysis into historic sales and supply trends for more accurate forecasting.

2. Scrutinize Manufacturing Productivity & Efficiency

The pressure of keeping up with production demands, especially when business is good, can make it easy to overlook little inefficiencies in your manufacturing flow. It’s important to review bottlenecks in processes, eliminate redundant or wasteful tasks, and optimize resource allocation to ensure you’re maximizing shop production.

3. Minimize Scrap

Scrap is another easily overlooked form of waste, and sometimes a form of wasted opportunity. It’s also a factor that inflates the cost of goods sold. There will always be scrap in manufacturing process and having a creative option for minimizing or using scrap or obsolete materials can make a difference. It can never hurt to think outside the box (of scrap).

4. Invest in Preventive Maintenance

When production is beyond capacity, it’s natural to want to put off costly maintenance services, especially if they require downtime or an interrupted production schedule. But regular maintenance should be thought of as an investment in preventing downtime and interruptions. Not to mention unscheduled downtime tends to be more expensive, given the labor costs of idle employees.

5. Ensure that You Have Solid Financial Reporting

The best strategies for reducing costs and growing your margins are built around solid financial reporting that provides both real-time insights into the financial health of your business and historic tracking you can use to plan and forecast for better cost controls and decision-making.

An analysis of your financial metrics should provide you with answers you can use to reduce costs, fine-tune pricing, and limit your exposure to fluctuations in material costs, among other process improvements including:

Inventory planning
Material cost management
Cash flow projection
Sales forecasting
Monthly financial statement tracking and reporting
Accounting software cleanup and process development
Product costing
And more

Accounting Support with Manufacturing Industry Expertise

With the right accounting support, growth-minded manufacturing business owners get the financial visibility they need for better decision-making and process improvements that drive profitability, competitive advantage, and long-term growth.

With a holistic approach to accounting and wide array of strategic tax and business advisory services, Kirsch CPA Group helps manufacturing clients develop solid plans for meeting short and long-term financial goals.

Contact a member of our team to learn more about our track record of growth and success for manufacturing businesses. You can also download our guide, Build a Better Business by the Numbers, for a detailed look at profitability traps and other common errors that can impact your bottom line.

Learn more about manufacturer accounting services