Best-in-class consumer packaged goods (CPG) accounting and finance departments are particularly adept at understanding their product-driven companies, integrating themselves into their organizations and pushing finance and accounting insight throughout the company. Companies that want to develop best-in-class departments can take strides by asking the right questions and taking care to work their way to the right answers. I’ve broken up the questions below into broader areas to help CPG accounting and finance teams focus their efforts. While some of the activities expressed in the questions below seem readily apparent, they are not always activities that are prioritized and completed.
Tracking Monies In and Out
These questions are centered on good behaviors in tracking the cash flow of a CPG business. While cash flow is important in any industry, it is particularly important in CPG because these companies sell to large powerful companies like Walmart and Costco, who will be aggressive in setting the terms for their contracts.
Do we actively work on a cash receipts and disbursements forecast?
A cash receipts and disbursements forecast is a simple way to review what is coming in and going out of the bank, as well as preparing a short-term forecast of the expected activity. This simple process keeps the company on top of its cash, can guide weekly expectations for incoming (Accounts Receivable) and outgoing (Accounts Payable) and can support strategy around needed cash including bank and investor requirements.
Do we conduct a thorough balance sheet review?
This process ensures everyone is aware of what is held on the balance sheet and can manage the balances properly. Without a strong knowledge of the balance sheet and well-documented accounts, a company can’t be sure that its income statement is accurate. The balance sheet is not as exciting as the income statement, but it is where the accuracy in the income statement is derived.
These two processes are impactful and not very challenging to execute. You can start the cash flow forecast today by managing and understanding what is going in and out of the company’s bank account. Then use those same inflows and outflows to map out the next week, month and quarter. Consider this a rough guide, so it doesn’t have to be perfect, but rather directional in nature. It can even help to work through a full year of forecasting cash this way.
For the balance sheet, make sure all the accounts are properly reconciled. Then have a meeting to review and understand the detail behind the accounts with everyone up to the CFO. Any issues can be resolved with others throughout the organization, and cleanup can happen over time. These are simple steps and can be started with little effort, and the results can be dramatic even in a short time.
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For a product-driven company in the food and beverage industry, a few focus areas that can help drive understanding, actionable information and strategy are thorough reviews of discounts and allowances and Cost of Goods Sold (COGS).
Is our approach to discounts and allowances good for business?
A handful of expenses fit between gross revenue and net revenue on the income statement. These expenses are related to discounts between the product manufacturer and the retailer that are used to impact sales to the end customer.
The piece of the puzzle that makes these an area for further review is timing. These adjustments are made after the sale of the original goods and are based on volume and activity that is not known at the initial time of sale. That makes the analysis of the expense much more important.
Let’s take a quick look at the lifecycle of these activities:
- The manufacturer agrees to fund a certain activity and at that point, a forecast for that activity is necessary.
- The product is sold and delivered to the retailer, who then sells the product to end customers using the discount program as agreed with the manufacturer.
- The retailer then either deducts the expense from invoices it is paying or sends its own invoice to the manufacturer.
This lifecycle sounds simple enough, but it gets complicated once you multiply it by the hundreds of discount programs across your retailer customers and add in the accrual that you will need to take to properly account for the agreements. Your team, from leadership to sales to finance and accounting, needs a deep understanding of the process and the importance of each step to enable proper, accurate treatment. The real value lies in the ability to forecast each activity and understand spend to guide proper accruals that lead to accurate financials. Without the deep knowledge, you could be spending too much or too little or not have an awareness in a shift in these expenses.
This is another area where you can just get started – have the team meet to understand the process for managing discounts and allowances. Have someone review the actuals vs. the accrual for the past quarter. Again, simple steps to gain improvements over time.
How clear are we on Cost of Goods Sold?
Cost of Goods Sold (COGS) is the next area on which to focus. This is an area of the income statement that is full of activity for a tangible product-driven company. Education in this area can be so helpful. As people understand the activity better – what is in and what is out and how it is calculated – it can lead to great insight particularly in an inflationary environment with constant change.
The just-in-time world with activity across the globe has been challenging (to say the least) over the past few years. This demands more understanding of the cost fluctuations buried within COGS. Even simple items like what is in the standard cost and how is it measured are important. And for leadership, operations and finance, it can be extremely valuable to be able to answer questions like:
- What about the shipping costs coming across the ocean?
- How are labor and overhead allocated, and what is in the cost pool being allocated?
- Where do various personnel and their respective cost sit on the income statement – COGS (direct or overhead) or below gross margin?
- What are the controllable costs in each category so that we can better manage and contain the constantly changing cost?
- And last but not least, how do we understand and explain the variances that have become commonplace over the past two years?
The second large step in COGS is related to new product introductions. The structure of standard cost needs review, so that people have a guide to decision making. Questions to ask include:
- Is the standard an accurate cost for today, or is it 6 months out of date?
- How do we use our people and process to accurately reflect the cost on a new production introduction?
- Have we accurately captured one-time costs and cost variations to our current products?
- What about something as simple as a product flavor or packaging variation – are we forecasting an accurate representation of the resulting cost variances?
These are the questions that will guide the business to its next great products with an accurate cost profile as part of the new product business case. There are a lot of questions and resulting actionable information buried in discounts and allowances and COGS. The sooner your company answers them, the better off you will be.
My best advice here is again to just get started – significant improvements can happen in small steps with each monthly close. Every month, make something better. Pick a couple of accounts, and dig into the reconciliations. Start a cash flow forecasting process. Dig into any line item on the income statement or balance sheet, and make sure everyone understands it – not just finance and accounting.
In this ending is a beginning – what will be your company’s first step?
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