This article talks about a less conventional way to look at the profitability of your food processing company. It’s generally accepted that management accounting is important to successfully running a manufacturing business, food processing being no different. What separates different companies in the long term is often a matter of how often your perception of the performance of your business aligns with what’s actually happening.
In order to minimize the gap between perception and reality, you first need to identify which indicators are the best ones to use for managing the business and what goals they’re tracked against (growth? profitability?). Then you need to implement a system which allows you to produce those indicators easily, on a regular basis, so you can track your progress.
How Most Food Processors Look at Profitability
We’ve found through our work that there are a wide variety of ways food processing managers might want to look at profitability. The most common way is through periodic income statements which detail sales, cost of goods sold, overhead and income for a period.
This is a fairly common way of understanding profitability. When it comes to income statements, the more revenue and expenses are split out into distinctive accounts (lots of detail), the more useful the statement is for management purposes.
We’ve found however that there are many aspects of financial management which cannot be informed effectively through the use of income statements, which is why we provide our customers with a tool for evaluating what we call customer & item profitability.
What’s Customer & Item Profitability?
Customer & item profitability reporting is a way of looking at your business by including all possible product-related costs in the analyzed cost of the product you sell and then reviewing each individually. This spans all the way from your raw materials, through processing and on to finished goods.
By including all possible costs into the cost of your products for management calculation purposes, you can get the most accurate picture possible of what you’re making on each item & customer. The end result of tracking these more accurate cost figures is it allows you to evaluate the profitability of individual items and customers.
Through verified lot traceability (I’ll talk about this in a subsequent post) you can see which individual lots of product were sold and shipped to which individual customer. This allows you to capture the cost of the product on an individual invoice. Altogether, this initial tracking can give you far superior information when you go back to review it.
What Does It Look Like In Action?
The format to evaluate the profitability of a customer/item can either be by item (each item is listed and under that item is a list of every customer who gets it) or by customer (each customer is listed and under the customer is a list of every item that customer gets). One gives you a snapshot of how profitable an item is, the other a customer. The item/customers you’re reviewing are listed along the left-hand side of a spreadsheet/report.
For a given period (people often use four weeks, a month or a year as the period) you would list a number of different pieces of information across the top of the spreadsheet/report. We recommend columns for: quantity sold, sale price, total sale amount, total cost, margin achieved and margin percent. Here’s what it looks like in practice (by item)…
or by customer.
As you can see, the far right-hand column gives you a quick way to determine if the customer and/or item are profitable to the business or not. Combining comprehensive product costing with this kind of analysis gives you far more insight than an income statement would as to which items/customers are profitable vs. those which need improvement. We believe these reports are a critical tool for managers to make decisions effectively.
How are you looking at your profitability right now? Are you getting this level of detail so you can make item and customer level decisions?
Disclaimer: these reports are really useful for internal management purposes. I/we aren’t accountants and you should always consult one when preparing your financial statements.