This is an introduction to methods you can use for Operating Cost Reduction. This, in turn, leads to an increase in your Gross Profit.
Your Operating Costs can also be called Cost of Goods Sold (COGS) or Variable Costs.
We have standardised the term Operating Costs, but your accounts may use one of the other terms.
Note: Income – Operating Costs = Gross Profit
It refers to any expense that is only incurred when you produce an item.
If you increase or decrease productions, the Operating Costs go up and down in direct proportion.
Typical Operating costs include:
- Raw materials that go into the product.
- Consumables like energy.
- Casual or outsourced labour.
Permanent labour is more of a Fixed Cost because you can’t raise or lower it easily.
Reasons for Operating Costs Changes
Do you have historical accounting data?
- Look for changes in each of the Operating Cost categories between accounting periods.
Typical categories are:
- Non-permanent labour.
- Energy and other utilities.
- Raw materials, Inventory and Work-in-Progress.
- Packaging, shipping and transport.
The things you may be able to do to reduce your Operating Costs – without reducing your Revenue and therefore make a better Gross Profit – will be discussed in more detail in the other lessons in this Section.
Assuming your Overhead (or Fixed Costs) of things like Rent, and Permanent Labour do not increase, any improvement in Gross Profit will go directly to your Operating Profit making the business more profitable overall.
Some of the analysis referred to in the various Lessons in this Section can also be conveniently calculated in TrendBoard.
Click on the Lesson Content below to continue Operating Cost reduction.
For more help understanding any issues relating to this Section of the Turnaround90 Campaign, use the 12Faces Diagnostic System to drill down to root causes of problems and find our suggested Treatments.