Increasing sales revenue has always been the ultimate goal of every business, but getting your products on high demand doesn’t always guarantee a bigger profit. It would be best to consider that production costs reduce your earnings. Generally, production costs include direct materials, direct labor, and factory or manufacturing overhead costs, but the good thing is that you can cut all these expenses.
Even if your products are always sold, inefficient production methods will still drag your business’s revenue. Fortunately, there are many ways to reduce your expenses while maintaining the quality of your products. Here are ways you can do that:
1. Record your expenses
You should be aware of the exact amount that goes into the production process to know which part goes wrong in your factory. Take advantage of technology instead of hiring an accountant to do the job. There are many very easy-to-use cloud accounting software perfect for small businesses. You can use QuickBooks Online, FreshBooks, Zoho Books, ZipBooks, and more, depending on which among them you are most comfortable with.
Spreadsheets can also significantly help you track the numbers, which makes it even easier for you to share the file with your team so that they can also keep track of any amount your business cashes in and out. Keep a record of your production capacity, actual used capacity, direct material and direct labor cost, labor efficiency, manufacturing overhead, cost of the goods you sell, inventory costs, overtime expenses, and the ins and outs of stocks and cash.
2. Reduce the costs of direct materials
Direct materials make the most of your production expenses, so you should reduce their costs as much as possible. You might want to consider partnering with other competitive suppliers, if not cheaper, and create a contract for the long-term to assure the quantity they provide and to negotiate with them for the price. Suppliers often offer bulk discounts to businesses that have lengthy contracts, pay in cash, and do so promptly.
As much as possible, prepare a detailed backup list of other potential suppliers, too, including their name, email, phone number, and address just in case your original supplier lacks materials or increases the price.
3. Reconsider your materials
There is another way to reduce your expenses for direct materials without compromising your products’ quality. Brainstorm how you can restructure your product, specifically replacing the original materials with cheaper ones but never downgrading the quality. For instance, if you’re a furniture manufacturer, you can switch from raw wood to plywood, which is a much cheaper alternative.
This also means you reconsider using fewer materials instead that still retains the quality of your products. A few of the materials that don’t directly affect the products are documentation and packaging.
4. Increase the productivity and efficiency of your workers
Improve your labor efficiency by training your older employees and hiring new ones vetted for efficiency. Provide them all together with specialized and adequate training that will help them work much faster. You might want to consider offering incentives to the outstanding employees that produce their quota less than the time required.
Match their job with their skills. For instance, if they specialize in packing, then let them do only the packing. Employees tend to produce better quality when they’re heard, appreciated, and recognized, so make sure you motivate them with these.
Having a motivated, efficient labor force that does their job well will cut off the need to hire more, as they will likely stay in your company and achieve quality outputs. All the training, incentives, and recognition will make your one employee like an equivalent of three.
5. Lower manufacturing overhead costs
Manufacturing overhead aspects keep the factory running. These expenses include office supplies, building costs, utilities, insurance coverage, and more. However, these are considered non-value-adding costs and can be significantly reduced. Ensure that you check and update all your machines like the custom injection molders to prevent huge repair expenses in the future.
If possible, avoid installing electric devices in the factory, such as air conditioners where they aren’t needed. And see to it that you strive to reduce energy usage overall to reduce the bills. Always check the areas installed with air conditioners and other electrical appliances if they’re switched off when not in use. To optimize the factory’s use of energy, you can opt for an automated control system.
Save More and Gain More Profits
When taking steps to cut off production costs, always keep in mind to maintain the quality of the products. Gaining bigger profits is essential, but retaining loyal customers has the same weight.