Your company should always be working to increase its profit margins as your business grows.
For owners of product-based companies, one of the best ways to increase your overall profit is to take a look at how you can cut back on your manufacturing costs. Saving money on the production of your inventory allows you to increase your profit margin on each item sold.
While many companies jump straight to raising the prices of their products to save money, this may not always be the wisest move. Instead, there are a number of considerations to keep in mind to improve your company’s profitability by reducing costs from the manufacturer’s side.
On the other hand, you don’t want to use an untrustworthy manufacturer or produce a cheap yet poorly-made product that won’t stand the test of time. When choosing a manufacturer or looking to increase profit margins with your existing manufacturer, consider the following:
Top questions to ask your manufacturer to improve profit margins
Choosing the right product manufacturer can make or break your company’s potential success.
If you own a product-based business, be sure to ask your manufacturer the following questions:
- What are my payment terms and are discounts available? One of the top questions to ask your manufacturer is what your payment terms are. A lack of cash flow can make it hard for some businesses to keep up with their invoices, so it is important to know how much time you have to pay your manufacturer for the goods. Generally, invoices must be paid within 30, 60, or 90 days. Some companies may offer a discount for paying in advance or charge late fees for failing to pay on time, so find out what your manufacturer’s payment terms are. You’ll also want to know the manufacturer’s minimum order quantity (MOQ), turnaround time, and down payment requirements. Knowing these conditions and terms up front can save you money in the long run.
- What will my total costs be and are they subject to change? Before you contract with any vendor for your product manufacturing needs, you should have a complete understanding of the total costs from start to finish. You’ll also want to ask about any relevant fees and how to avoid them. In addition to knowing your total cost, it is important to know whether or not your manufacturer may increase your cost and under what circumstances. Find out how the company determines the need for potential price increases and how much notice you will receive of any changes. Will prices increase with inflation? If a supplier raises their costs, will yours increase too? Finding out these key details upfront is a wise move, especially when comparing potential manufacturers.
- What is my expected gross margin? Once you know the potential costs for ordering your products, you can begin to calculate your expected gross margin using sales projections. It is important to know and monitor your product’s gross margins. Gross margin is used as an indicator of the health and profitability of your business. To calculate your gross margin, simply subtract the total cost of goods sold (COGS) from your company’s total sales or revenue and then divide by the total sales or revenue. Gross margin is expressed as a percentage. For example, if your company had total sales of $750,000 in a given year with a total cost of goods sold of $250,000 – the gross margin would be 67%. It is important to note that the cost of goods sold includes more than just the manufacturing cost but also the shipping, packaging, fulfillment and staffing costs.
- Are there any volume incentives? Like many other types of companies, product manufacturers are often able to provide a discount for bulk production orders. With volume incentives, the more product you order, the lower the price per unit. Even if you don’t have the money up front for such a large production order, inventory financing through a company like Kickfurther can help your business get the funds you need to take advantage of these bulk discounts. Volume incentives can go a long way towards increasing your overall profit margins and steer your business on the path to success.
- Are they keeping up with technological advances? It is important to ensure that the manufacturing company you have chosen for your business is taking the steps needed to remain competitive in the market. Technological advances mean that the product manufacturing industry is changing all the time, and new technologies can greatly affect the way that manufacturers do business. Ongoing advances in software, automation, equipment, and other aspects of production can greatly improve your profit margins. Always make sure that you are staying up-to-date on industry developments and regularly comparing your manufacturer against the competition in order to take advantage of the lowest possible production costs for your company’s products. Choosing a company that keeps up with technology and seeks to keep costs low can save you thousands of dollars over the lifetime of your business operations.
How Kickfurther can help grow your business
Kickfurther exists to help small businesses achieve the growth of their dreams. Inventory financing on the Kickfurther platform gives small businesses an alternative way to fund their inventory purchases without the need for purchase orders or traditional bank financing.
Instead, Kickfurther uses a marketplace of investors who help fund your inventory on consignment, giving you the flexibility to pay back your balance as you receive sales revenue.
This process allows developing businesses to fund their inventory purchases upfront through community backing and keep up with increasing customer demand in a cost-effective way.
Using a company like Kickfurther for inventory financing allows you to cover the costs of producing and maintaining a large enough amount of goods in stock to remain profitable.
Asking the 5 questions listed above can help ensure that you see the best possible profit margins and net revenue from your product-based business without cutting corners. The better your profit margins are, the more cash flow you will have available to invest back into your business. The most successful companies are those who are always seeking to increase their profit margins and cut costs in every possible area of the supply chain from production to order fulfillment. It is important to continuously evaluate your company’s vendor relationships, including your product manufacturer(s). Saving money on production is key to increased profits.
When you need an influx of capital to fund your product-based business’s inventory, consider using the Kickfurther crowdfunding platform to cover your qualified business expenses.
Join more than 800+ inventory financing success stories and get started with a free business account today.