A key measure in understanding your profitability changes, is the COGS to Sales ratio. This ratio tells you the relative importance of your direct input costs to your sales revenues. Therefore, if your ratio is decreasing, this indicates that your direct costs are increasing relative to the sales revenues. Check your COGS to sales ratio now with Jazoodle. 

Definition used:

Costs of Goods Sold (amount) Divided by:

Total Income from operations (amount)

eg: Cost Of Goods $20,000, Sales $35,000 

COGS to Sales equals 20,000 / 35,000 [times 100] = 57%. Thus, your direct costs make up 57% of your revenues.

If your margins are falling, the answer could be a rise in the relative cost of your inputs (goods and labour). The COGS to Sales ratio indicates this. To improve it, there are a few things you can try or assess further:

• Negotiate better cost of goods terms with your suppliers.
• For direct labour costs increases, are you becoming less efficient in the making of each finished good or service? Assess measures such as overhead and net profit per employee – you may be over staffing