How to Increase Gross Margin
Gross margin is calculated by subtracting all cost of goods sold from the sales revenue of a company, then dividing the result by total sales revenue. This figure is expressed as a percentage, according to the website Investopedia. To increase your gross margin, you need to decrease your cost of goods sold. When your expenses decrease, it means a company can retain more of its sales revenue in the form of profit. A number of categories make up cost of goods sold.
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Instructions
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Determine all expenses that make up your cost of goods sold. Cost of goods sold can consist of material costs, manufacturing costs and direct labor costs. The cost of the material used for production contributes to your cost of goods sold. Wages paid to laborers during the production of goods also contributes to costs of goods sold.
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Reduce the costs associated with goods sold. Start using a vendor or supplier with cheaper costs. You will be able to purchase materials for a lower cost. Reduce labor costs by implementing wage freezes, layoffs and minimal salary increases, according to the blog ASTD.
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Calculate your gross margin before and after reductions. If your sales revenue is $1,000 and your costs of goods sold is $700, before reductions, you can calculate your gross margin. Your gross margin is 30 percent ($1000 - $700/$1,000). For every dollar of sales revenue, you make 30 cents. When labor and material costs are reduced, to a total of $500, your gross margin is now 50 percent ($1,000 - $500/$1,000). You are now making 50 cents for every dollar of sales revenue.
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Tips & Warnings
Cost of goods sold represents all expenses incurred during the production and manufacture of a company's products and services. If you can increase your sales revenue without increasing your expenses, you can increase your gross margin. If you can increase your sales revenue at a greater percentage than you increase expenses, you can increase your gross margin.
Make sure you don't sacrifice the quality of your products and services by purchasing cheaper material. There must be a balance.
