What is the Expenses To Sales Ratio?

What is the COGS to Net Profit Ratio

Profitability Measures

Cash is king! but profit generates excess cash. And this means that understanding your underlying profitability is critical to a healthy and sustainable small business. Understanding profitability leaks and the cause of them is critical to this. The COGS to Net Profit Ratio is one measure to help you in this

COGS to Net Profit Ratio

This ratio is a good indicator that helps you diagnose areas of your business that may be changing. And if, for instance, your Gross Profit Margins are falling, this could be for lots of reasons. One of these is the relative cost of all the things that go into making your product.

What does it mean?

A key measure in understanding what is affecting your profitability is the COGS to Net Profit ratio. Therefore, this ratio tells you the relative importance of your direct input costs to your profitability. If your ratio is decreasing, this could indicate that your direct costs are increasing relatively to the rest of your business. Check your ratio now with Jazoodle

How we derive COGS to Net Profit ratio?

The COGS to net profit ratio will vary between companies and we argue that there is probably no set scale or benchmark. Keep an eye on this over time as changes could indicate a number of things within your business.

Definition used:

Costs of Goods Sold (amount) Divided by:

Net Profit (amount)

eg: Cost Of Goods $20,000, Net Profit $5,000 

COGS : Net Profit equals: 20,000 / 5,000 = 4

How Can I Improve My COGS to Net Profit Ratio?

Finding your margins are lower than you would like, the answer could be a rise in the relative cost of your inputs (Goods and labour). The COGS to Net Profit ratio will indicate this. To improve it, there are a few things you can try or assess further:

  • You can negotiate better cost of goods terms with your suppliers.
  • For direct labour costs increases, are you becoming less efficient in making each finished good or service? Assess measures such as your overhead per employee, and net profit per employee – you may be over staffing
  • Identify inefficient internal processes within your business. Are process problems creeping in, meaning more direct labour costs are needed to fulfil each order?
  • Identify if your general overheads are rising more steeply than your other costs or sales revenues?

Want to speak with an accountant or business advisor?

We’ve some great accountant and business advisor partners. Please see our partner directory and connect with an advisor in your area

Newsletter

Sign up to receive all the latest news, media releases and tips and tricks from Jazoodle

Recent Post

Welcome To Jazoodle

You are just seconds away from creating probably the simplest, quickest, and easiest to understand and powerful view of your company

Jazoodle Business health, (our starter plan), is free for all individual small and medium businesses and not for profit organisations, so get started by signing up – it takes just a few moments!

SIGN IN

Signed up already? We welcome you back to the Jazoodle app. You can sign in here:

SIGN UP

Not signed up yet?
Sign up for free here:

Maintenance Window

Maintenance Window:

We will be performing limited maintenance for a brief period this weekend. This will be limited to some enhancements we’re making with the Single Sign On Functionality via the QuickBooks connectivity and will not affect sign up, or connectivity through Xero, or MYOB

When:

AU: Sunday 27th March 2022 4am – 12 noon

UK: Saturday 2th March 2022 6pm – 2am

US (PT): Saturday 26th March 10am – 5pm

 

Give your business
a head start

Need expert advice as to what your Jazoodle numbers mean or looking for a low cost business template?

business resources from just $5