Last updated on June 8th, 2022

How much of a profit did you make on each item produced yesterday? Last week, month or quarter?

Tracking and evaluating your production costs on a regular basis can help inform everything from your pricing and marketing strategies to sales, staffing, process improvement opportunities, and other factors affecting your profit margin and success.

According to the National Federation of Independent Businesses’ (NFIBs’) April 2022 Optimism Index, business conditions are at their lowest in almost 50 years.  Inflation is a problem for over 30% of respondents. Nearly 50% have job openings they can’t fill. Profits are down thanks to the higher material costs, weaker sales, lower prices, and higher tax and regulatory costs. Pessimism about anything getting better in the second half of 2022 is high.

While it would be understandable to declare your business at the mercy of so many external influences, regularly tracking and evaluating production costs can help you have more control over profits, productivity, efficiency, and more.

Quickbooks Intuit defines production costs as total expenses – like costs for labor, materials, machinery, rent and other overhead – incurred to produce a product or service. They impact pricing, cash flow, and profit or loss.

To calculate total costs, add fixed costs (which are the same regardless of how many products are produced and include things like rent, utilities, insurance, and monthly salaries) to variable costs (which change depending on production volume, raw materials, packaging, shipping, and more). So, if fixed costs are $30,000 a month and variable costs are $70,000, total production costs are $100,000. If you made 10,000 units, the production cost per unit is $10 ($100,000/$10,000).

When you can manage to maintain or even reduce production costs without compromising quality, you can maintain or increase profit margins and business success.

Consider:

• Tracking and analyzing your production numbers regularly. By watching your production costs, you’ll know when expenses change and how they may affect sales and profits, so you can proactively adjust – production, pricing, marketing and more – as needed.
• Negotiating and shopping around for materials and services. With raw material shortages, supply chain issues, and dramatic price swings for fuel, putting extra effort into managing costs can have a big impact on your bottom line. You may find your suppliers will negotiate, especially if you’re a long-term, dependable client. Explore potential discounts that may be available in return for longer contracts, bigger orders, and cash payments.
• Evaluating every step in the process for efficiencies. Eliminate anything that does not add value, including excessive packaging which can drive up shipping costs and waste. Schedule equipment maintenance to reduce issues and downtime.

Perhaps one of the best things you can do is invest in software.

Software can help all your processes and systems talk and feed each other to help with enterprise resource planning (ERP). As an added benefit, you can track productivity by person and align training and incentives accordingly. Yes, it’s a big time and money investment, but when there are so many headwinds, being armed with the type of insights and information an ERP system can provide may just be what you need for long-term success.

There is one other thing you can do to promote success – choose RBT CPAs to handle all your accounting and auditing needs. Contact us to find out why we’re the Hudson Valley’s leading accounting firm and one of the top 250 nationwide.