The Fastest way to boost profitability of a Food & Bev business


Image

Most of my consulting work is about helping Food & Bev SMEs with profitability issues. Contrary to common belief, it is not sales what drives a company’s towards growth. Whilst a stable source of sales is essential for any business, sales are pointless if don’t result in enough profit to:

  1. Cover the costs of a company’s supporting activities –from rent to salaries

  2. Generate enough surplus of resources that can be re-invested in strategic tasks like NPD, Post sales, Marketing etc.

So why most entrepreneurs are wrong about sales and profits?

A common misconception about profits is that “once we can generate enough sales, we will be profitable” This is generally true but it doesn’t address one element of the profitability equation: the gross margin.

The idea that more sales = more profits is just not always true, in fact more sales = more profits only if Cost of sales are stable. The cost of sales, for a F&B business, should always include the landed costs (purchase plus goods-in transport, receipt and, if applicable, storage of the raw material and manufacturing). Here is an example:

Company A launched a new line: Apple & cranberry pies and, over the last 4 months, made £250k of sales. Their gross margin is 10%

Image

To manufacture the new lines the company is employing 2 additional members of staff with a combined salary of £600 per week for the first month. As sales increased, the company hired additional labourers over four months. Since these members of staff were employed to manufacture this line only, their wages, once applied, returned a very different scenario

Image

The actual gross profit of the lines was around 4.8% with the lowest being 3.99%

  • THE CORRECT WAY TO ADDRESS PROFITABILITY

A good place to start looking at the causes of profitability issues is to break down the issue into its main components. Here’s a quick guide:

Image

You can see how increasing sales is one of the many elements driving profitability. It’s also an element that drives profits down – increasing direct costs- and up – increasing revenues. This is why sales alone is not enough to understand profitability.

To effectively analyse the profitability of a Food & Bev business, we must consider all the elements; I too prefer starting from sales, it’s the easiest to measure and usually, data that most founders and directors have immediately available. Given that our sales are in line with the target I progress breaking down total sales by sales amount and selling price, this is a good starting point to check your company position against the market. Are your prices aligned to your competitors? Are you able to charge more or should you reduce the prices?

Remember sales & revenues depend on the market, consumers and competitors, by analysing sales volumes and prices you analyse how you are positioned in your market. Then it’s time to look at the cost. I start from direct costs because, in my opinion, this is where Food & Bev businesses most differ. Landed costs, storage, manufacturing and packaging are all elements that a F&B company should account for as direct costs. These plus inventory wastages.

Here’s an example:

Product A Raw material inventory = 100kg cost = £1,500.00 (£15.00 per Kg)
Final product inventory 90kg price = £2,700.00 (£30.00 per Kg)
Gross margin per Kg = 50%
Gross margin per batch sold = 44.4% {[(2,700.00 - 1,500.00) / 2,700.00]/100}

In the case above, if you budgeted and priced your final product based on a 50% gross margin, you might be selling at a loss every time a wastage occurs. Not ot mention the wastage of the finished goods which value is higher. On top of this analysis, you need to add the landed costs which is the cost of purchasing the goods plus collection, transport, delivery and receiving the goods.
Finally, where applicable, the manufacturing costs. These must include labour and packaging.

The last element to look at to perform a proper analysis is indirect costs. All costs associated to running the company including wages, IT, rent of facilities and utility bills, marketing, HR and other expenses related to running the business.

  • How to create a system that help tracking profitability consistently

Unfortunately, there is no easy way of creating a system to consistently monitor a company’s profitability. There are though many awful ways of doing it. Here’s my list of horrors:

  • Spreadsheets made from spreadsheets linked to other spreadsheets...

Look I am a big fan of MS Excel and I am proud to be an advanced user but. Excel is not a tool to store data. It is indeed a fantastic app to process calculations and logical functions. Great for fast, self-service analysis of good data (read checked, validated and stored safely in a proper accounting software). This is the point: Profitability, revenues, costs are too important to be managed in a spreadsheet. This tool flexibility is also the reason why you should never manage critical data there.

  • Delegate the task to non-financial personnel

Your company’s P&L, apart from being sensitive data of critical importance, is a financial resource. I have seen directors delegating the creation of profitability reports to operational staff just because: They are great with Excel, they are good with numbers, they can get the report from that department fast... P&L is money, don’t delegate this stuff unless you are making 100s of million and you can afford a team of accountants lead by a finance director

  • If you are serious about monitoring profitability of you Food & Bev business (and you should really) invest in a proper enterprise software
In conclusion

Sales, more sales, more customers and how to get them. Such a trigger for most entrepreneurs, working to increase sales is the glamorous part of running a business. That’s why most entrepreneurs consider this metrics so important. Yet, sales only are not what an entrepreneur should look at when analysing profitability. As Michael Potter says, if the goal is more sales why not just cut all the priced by 50%…

Sales is vanity, profit is sanity.

Leave a Reply

Your email address will not be published. Required fields are marked *