5 Effective Ways to Reduce Cost of Sales

Quick answer: To reduce your cost of sales, renegotiate supplier terms, cut stock waste and shrinkage, streamline carriage-inwards and logistics, automate repetitive production or admin tasks, and review your product mix to drop low-margin lines. Tracking your cost of sales monthly and recording it accurately is what makes these savings show up on your bottom line, not just on paper.

Key Takeaways

• Cost of sales = opening stock + purchases − closing stock + direct costs like carriage inwards.
• A lower cost of sales means higher gross profit and, usually, more corporation tax to pay ; so track it properly rather than guessing.
• Most restaurants aim for a food cost of 28–35% of revenue, according to Rezku and Restaurant365 (2026).
• "Cost of sales" and "cost of goods sold" (COGS) mean essentially the same thing cost of sales is the UK term, COGS the American one, per FD Capital.
• AI can trim some sales-admin costs, but InData Labs found only 41% of businesses saw a 10–19% cost reduction after adopting it, so treat AI savings as a bonus, not a guarantee.

If you've ever stared at your profit and loss account wondering why your margin feels thinner than it should, cost of sales is probably where the answer's hiding.

Here's a fact that catches a lot of business owners out: cost of sales and cost of goods sold (COGS) are, in most cases, the same figure wearing a different accent; "cost of sales" is simply the British way of saying it, while COGS is the American term more common in ecommerce and software circles, according to FD Capital.

Mix them up on your accounts and nobody will blink. Mix up what's included in that figure, though, and you could be under- or over-stating your profit to HMRC.

This guide breaks down what cost of sales actually means, how to calculate it, and — because this is what you're really here for five genuinely effective ways to bring it down without starving your business of what it needs to sell.

What is cost of sales in accounting?

Short answer: Cost of sales is the total direct cost of producing or buying whatever you sell. If you run a shop, it's your stock. If you run a service business, it's mostly direct labour and subcontractor costs. What it isn't is your rent, your marketing spend, or your admin salaries; those sit under overheads instead.

Why it matters: cost of sales gets deducted from your turnover to work out your gross profit, and gross profit is the number that tells you whether your pricing and your production costs are actually in sync.

Turnover − Cost of Sales = Gross Profit

What is the formula for cost of sales?

The formula for cost of sales is;

Cost of Sales = Opening Stock + Purchases − Closing Stock

Worked cost of sales example: Say you start the month with £750 of stock, buy in another £600, and end the month with £450 left unsold. Your cost of sales is £750 + £600 − £450 = £900.

Service businesses don't hold stock, so they typically calculate it as direct labour and subcontractor time spent on completed work, minus time spent on unfinished projects not yet invoiced.

What are examples of cost of sales?

• Raw materials or stock bought for resale
• Direct labour (staff making the product or delivering the service)
• Carriage inwards (the cost of getting goods delivered to you)
• Packaging
• Subcontractor fees
• Production overheads directly tied to output

What it excludes: rent, marketing, admin salaries, insurance, and distribution/carriage outwards; these all sit under operating expenses instead.

What is the cost of sales vs COGS?

According to FD Capital, the two terms describe the same underlying concept in the vast majority of real-world accounts; the difference is mostly about which side of the Atlantic you're trading from.

What is a good cost of sales percentage?

There's no single "good" cost of sales percentage. The right figure depends on your industry, so be wary of anyone quoting one universal number.

Restaurant benchmarks

• A food cost of 28-35% of revenue is typical.
• Vanta Insights (2026) notes that anything below 28% could point to portioning or quality compromises rather than genuine efficiency.

Not in hospitality? Build your own benchmark

Rather than chasing someone else's number, work out your own cost of sales ratio and track it over time:

1. Add up your total cost of sales, including stock, materials, and direct labour.
2. Divide it by your turnover for the same period.
3. Multiply by 100 to get your cost of sales percentage.
4. Repeat monthly or quarterly to spot trends in your gross profit margin.

Cost of Sales Ratio = (Cost of Sales ÷ Turnover) × 100

Is your ratio creeping up? That's often the first sign that supplier prices, waste, or pricing strategy needs a closer look.

5 Effective Ways to Reduce Cost of Sales

1. Renegotiate with your suppliers and consolidate orders

This is often the lowest-effort, highest-impact lever business owners haven't pulled recently. Here's how to use it:

• Get three quotes before renewing any supply contract. Even if you stay with your current supplier, you'll have evidence to negotiate with.
• Ask about early-settlement discounts. Many suppliers will knock 2-5% off if you pay within 7 to 10 days.
• Consolidate small, frequent orders into fewer, bulkier ones to unlock better unit pricing.

Example: Say you run a café and order £400 of coffee beans every week at £10 per kg. Switching to a fortnightly order of £800 could qualify you for a bulk rate of £9 per kg. That's a saving of £40 per fortnight, or over £1,000 a year, without changing a single recipe. Ask for an extra 3% off for paying within 7 days, and you'll save even more.

2. Cut waste, shrinkage and returns with tighter stock control

Every item written off as damaged, expired, or missing is pure cost of sales with no revenue to offset it. Are you losing more stock than you realize? Here's how to tighten things up:

• Set par levels: Decide the minimum and maximum amount of each item you should hold, so you never over-order perishables.
• Run regular stock-takes: Weekly counts for fast-moving or perishable items help you spot missing or wasted stock before it adds up.
• Use FIFO (first in, first out): Rotate stock so older items sell first and don't spoil on the shelf.
• Control portions and forecast prep: In a restaurant, the difference between a 32% and a 40% food cost often comes down to how carefully kitchen staff measure ingredients.

Example: Say your café has £5,000 of monthly food sales and a 40% food cost, so you spend £2,000 on ingredients. By weighing portions, forecasting prep from your sales data, and rotating stock with FIFO, you bring that down to 32%, or £1,600. That's a saving of £400 a month, or £4,800 a year, without raising a single price or losing a customer.

3. Trim carriage-inwards and logistics costs

Carriage inwards is the cost of getting stock delivered to your door. It counts as part of your cost of sales, yet it's easy to overlook. Here's how to bring it down:

• Consolidate deliveries: Fewer, larger drops mean fewer delivery charges.
• Set minimum order thresholds with suppliers: Agree a spend level that unlocks free or discounted delivery.
• Source locally where it's cheaper: Compare the full delivered cost, not just the unit price, against importing.

Example: Say your café receives 10 separate supplier deliveries a month, each costing £15 to deliver. That's £150 a month in carriage inwards. By consolidating orders and agreeing a minimum spend with your main suppliers, you cut it to 4 deliveries, or £60. That's a saving of £90 a month, or £1,080 a year, without changing what's on your menu.

4. Streamline production and direct labour, with automation where it genuinely helps

Rota planning, demand forecasting and scheduling are some of the quickest ways to cut wasted direct labour hours. Here's how to approach them:

• Plan rotas around demand, not habit. Look at your sales or booking data to see when you're actually busiest, then schedule staff to match.
• Forecast ahead. Use last year's figures, seasonal patterns and upcoming events to predict quieter and busier periods.
• Use AI tools where they help. Scheduling and forecasting software can do much of this for you, but keep your expectations realistic. Data Labs (2026) found that 41% of businesses saw only a 10-19% cost reduction after implementing AI. McKinsey's State of AI (2026) also notes that savings are most consistently seen in supply chain and service operations, so they're not guaranteed everywhere.

Example: Say your café pays four staff to work a 9am-5pm shift every day, at £12 an hour. Your sales data shows that between 2pm and 5pm, you only need two people on the floor. Cutting two staff members for those three hours saves 6 labour hours a day (£72). Over a six-day week, that's £432, or roughly £22,400 a year, with no impact on your busiest periods.

Worth knowing: most AI-driven sales and marketing savings, like automated lead qualification, reduce your overheads rather than your cost of sales. That's because sales admin usually isn't a direct production cost, so don't count these savings in the wrong place when you're calculating your margins.

5. Re-engineer your product mix and pricing

Not all products or services earn you the same profit, so tracking gross margin by product or service line (not just overall turnover) shows you where your money is really made. Here's how to put it into practice:

• Calculate gross margin per line: revenue minus the direct cost of sales for that product or service, divided by revenue.
• Spot the drags: flag any line whose margin sits well below your average.
• Take action: reprice it, drop it, or consider ingredient or material substitutions where quality allows.
• For service firms: this often means dropping loss-leading project types in favour of higher-margin retainer work.

Example: a freelance design studio earns £30,000 a year from one-off branding projects and £30,000 from monthly retainers.

Overall, the studio looks healthy at a 45% blended margin. But branding projects are quietly dragging that average down. Raising project prices by 15% or shifting more clients onto retainers could lift your overall margin without needing a single extra sale.

Bookkeeping tip: none of this works if your underlying records are shaky. Accurate, consistent bookkeeping using proper accounting software ensures your cost of sales figure is correct for both management decisions and HMRC and Companies House filings. Not sure whether a cost counts as a direct cost? Check it against HMRC's guidance before you categorise it.

How to reduce cost of sales in a restaurant

Food cost is simply the restaurant world's name for cost of sales. Getting it under control comes down to four practical levers:

• Portion control: Weigh and standardise portions so every plate costs what you expect it to.
• Supplier renegotiation: Compare quotes regularly and ask for better terms on your highest-spend ingredients.
• Less spoilage: Use FIFO (first in, first out) stock rotation so older stock is used before it goes off.
• Menu engineering: Highlight higher-margin dishes so customers are nudged towards them.

Most restaurants should aim for a food cost of 28-35%, according to Rezku and Restaurant365 (2026).

Example: Say your restaurant brings in £10,000 a week in food sales and spends £3,900 on ingredients. That's a 39% food cost, well above the target range. Tighter portions and less waste could trim £500 from your weekly ingredient spend. Your food cost drops to 34% (£3,400 ÷ £10,000), and that extra £500 goes straight to your gross profit without a single additional sale.

TL;DR - Cost of Sales

Cost of sales is the direct cost of producing what you sell. It's often used interchangeably with COGS, but it's not the same as your overheads.

What's included?

• Opening stock plus purchases, minus closing stock
• Direct costs like carriage inwards and direct labour

How can you reduce it?

• Renegotiate supplier terms
• Cut waste and shrinkage
• Trim logistics costs
• Streamline labour, using AI cautiously where it genuinely helps
• Review your product mix for low-margin lines

Why does it matter? Lower cost of sales means higher gross profit, and higher taxable profit too. So keep your records accurate and up to date.

Frequently Asked Questions about Cost of Sales

What is cost of sales formula?

Cost of Sales = Opening Stock + Purchases − Closing Stock, including direct costs like carriage inwards.

What is included in cost of sales?

Stock/materials, direct labour, carriage inwards, packaging, and subcontractor costs directly tied to what you sell.

How to reduce cost of sales in a restaurant?

Tighten portion control, rotate stock using FIFO (first in, first out), renegotiate with your food suppliers, and cut spoilage. Your target food cost depends on your service model and overhead (Rezku, Restaurant365, 2026):

• Fast food / QSR: 25%–30%. High volume and lower ingredient costs keep this one lean.
• Casual dining: 28%–35%. This is the standard industry baseline.
• Fine dining: 35%–40%. Premium ingredients are offset by higher menu prices.

Not sure where you land? Work out your food cost percentage each month and compare it against your restaurant type.

Is cost of sales the same as cost of goods sold?

Yes, in practice. Cost of sales is the UK term, COGS the American one; both describe the same direct costs in most small business accounts, per FD Capital.

Is cost of sales an expense?

Yes. It's recorded as an expense on the profit and loss account and reduces your gross profit.

What are the cost savings of using AI for sales?

Modest and situation-dependent. InData Labs (2026) found 41% of businesses saw a 10–19% cost reduction after adopting AI, mostly in admin tasks like forecasting and lead qualification — these typically affect overheads, not cost of sales directly.

How do you calculate cost of sales?

Add opening stock to purchases made during the period, then subtract your closing stock.

How do you record cost of sales journal entries?

Typically: debit Cost of Sales, credit Purchases or Inventory when stock is used or sold. At period end, you may also debit Closing Stock (balance sheet) and credit Cost of Sales to adjust for unsold stock.

What is the cost of sales in ecommerce?

Product cost, inbound freight/carriage inwards, import duty and packaging. Outbound shipping and advertising usually sit under distribution and marketing expenses instead.

Is cost of goods sold the same as cost of sales?

Yes, see above. Treat them as interchangeable unless your accountant advises otherwise for your specific sector.

Is cost of sales a debit or credit?

A debit. It's an expense account that reduces profit.

What is the cost of sales ratio?

(Cost of Sales ÷ Turnover) × 100. It shows what percentage of your revenue goes on direct production costs.

What is cost of sales allocation?

The process of assigning direct costs, materials, direct labour, and production overheads to the specific products or services they relate to.

How does the cost of sales affect my tax?

Cost of sales is deducted from turnover to calculate your taxable trading profit, as outlined in PwC's UK Tax Summaries. A lower cost of sales means higher taxable profit, and potentially more corporation tax, so accurate recording matters as much as cutting costs.

Is carriage inwards included in cost of sales?

Yes. Carriage inwards (delivery costs for bringing stock to you) is part of cost of sales. Carriage outwards (delivering to your customers) is not, it's a distribution expense.

Don't let cost of sales eat your profit or your deadline

Getting your cost of sales right isn't just about trimming expenses. It directly affects your taxable profit, your HMRC filings, and your Companies House accounts. Get it wrong, and you're either overpaying tax or risking a compliance headache you didn't need.

Debitam has helped thousands of UK sole traders and small businesses get their numbers right, file on time, and actually understand what they're looking at. Don't wait until the deadline is breathing down your neck.

We help over 26,000 business owners, self-employed professionals, and contractors across the UK, and we've been rated 4.9 on Trustpilot for 8 years in a row, outperforming other online accountants across +6,200 reviews. Talk to us today, and we'll tell you, plainly, whether you owe anything, and get it filed before the deadline creeps up on you