As we navigate the post-pandemic era, food and beverage finance leaders face the challenge of managing profits in the face of a shifting consumer mindset. The economic environment has also changed dramatically, with record inflation, global supply chain disruptions, labor shortages and a potential slowing economy. To increase profit margins in this volatile landscape, financial leaders must embrace innovation and analytics to adapt to changing consumer behavior, balance investments in consumer engagement and manage the increasing costs of materials, labor and factory overheads.
However, economic indicators suggest that food and beverage companies may experience flat to slightly down margins in the coming years. To achieve long-term success, CFOs must align the company’s strategy and focus on data-driven financial analysis and modeling. By breaking down the P&L into three areas of focus – Revenue, Operating Expenses and Cost of Goods Sold (COGS) – financial leaders can develop effective strategies to maintain the financial health of the business.
Revenue is a crucial component of a food and beverage company’s financial health, especially in the face of changing consumer behavior. Understanding and forecasting consumer behavior and consumption patterns is essential to revenue forecasting. CFOs must work closely with marketing and advertising teams to analyze consumer behavior and its financial impacts on the company’s sales strategic plan. Some of the questions to be addressed include:
- Are consumers spending less on your best-selling SKU?
- Are they substituting purchases for different categories or lower-priced or lower-margin products?
- Should the company go after new markets or new distribution channels to grow market share?
It is important to note that redefining the customer and business models can be risky, so financial leaders should prioritize optimizing their current resources.
Good food and beverage CFOs have a solid understanding of Price Volume Mix for their top-selling products, and the most successful CFOs understand Price Volume Mix for all their products and continually optimize margins. Having the right financial team and analytical models in place is paramount to understand shifts customer behavior and the market.
CFOs have a direct impact on P&L profitability through rigorous use of analytics. One tool available to CFOs is managing the costs of operations, such as headcount and operating costs.
For example, last month:
- Did you understand the variance in salaries and wages?
- Were there any unexpected changes like resignations, hires, severance or bonuses of which you were unaware?
- Do you have approval workflows and agreements with HR and hiring managers for all decisions above a certain dollar threshold?
- Is there an analyst responsible for tracking and reporting on your HR and financial KPIs?
Most companies cannot easily answer these questions. CEOs and CFOs gain comfort knowing the exact headcount at any given time, giving them the ability to adjust as needed with demand. Especially important for food and beverage finance leaders is being able to forecast the resources needed for a production run, which involves answering questions like:
- Which manufacturing line is going to be used?
- When will the inventory be ready?
- How many shifts are you going to run?
- How many employees will you need?
- Do you need to bring in outside or temporary employees?
- Are there any single points of failure that need to be mitigated?
Being well prepared before the run will make sure everyone agrees on the cost structure and allow CFOs to set up Key Performance Indicators (KPIs) to measure actuals against plans. The KPIs also should work in conjunction with the manufacturing KPIs. Great CFOs not only plan well but also gain alignment across the organization on KPIs and help keep the business accountable.
In the broad view of finance, headcount is usually the largest cost. Once you have a solid model in place, your organization will be much more productive and efficient around people management. In parallel, operating expenses (non-COGS) should be clearly understood.
Additionally, can your finance team easily report on variances to plan each month? Most companies have very straightforward variance analysis models and should be able to provide board-level explanations.
Costs of Goods Sold (COGS)
On the other hand, for food and beverage companies, one of the hardest models to provide variance analysis on is the COGS model. It is also one of the most important.
I have noticed that many companies struggle to link demand forecasts (sales) to the production of supply (manufacturing). The food and beverage industry faces increased pressure on COGS due to higher ingredient and labor costs, as well as factory overheads. Also, companies in this industry may need to consider unique factors, such as the time it takes to receive ingredients from different locations or the availability of certain crops.
It’s crucial for companies to have full transparency into their COGS and ensure that their financial systems can handle that transparency. They must also have the right analytical models and KPIs in place, as well as a skilled team to provide the analysis. Furthermore, they should be able to easily link their demand forecast to their material cost and forecast labor costs. These key items are especially important as macroeconomic pressures continue to mount for Food and Beverage companies.
Forecasting raw material prices has become much more difficult in the current economic environment and will be a key factor for the continued survival of most food and beverage companies. Great companies have dedicated resources to analyze the raw material prices and hedge as much as possible. For example, if one of the company’s main ingredients is beef, as a CFO, I would want to know:
- How many different suppliers do we have?
- What if there is an issue with our order, can we easily substitute with another supplier, and at what incremental cost?
- How far in advance can we lock in a price/pound?
- What kind of financial impact would we have if we had to buy beef in the open market?
As consumer behavior continues to evolve, inflationary pressures increase, global supply chains are disrupted and the economy slows, food and beverage finance leaders that want to thrive must focus on COGS and build more robust financial models to support growth. This can involve identifying ways to cut costs, negotiate better prices for materials and optimize the supply chain to be more efficient.
Food and Beverage Finance Leaders: Plan for Success
CFOs in the Food and Beverage industry who aim to thrive are focusing on COGS analysis and developing more comprehensive financial models to bolster growth in the face of changing consumer behaviors, inflationary pressures, global supply disruptions and the impending economic slowdown. Are you on track to achieve the same level of success? Ultimately, success in the industry will depend on how well companies can adapt to these changes.
About the Author
Branden has 15+ years of progressive experience in all aspects of finance, accounting and financial operations. His experience includes strategic planning, due diligence, forecasting and budgeting, financial analysis, management and board reporting, systems implementation, month-end close and process improvement. He has worked with a wide range of companies ranging from international start-ups to Fortune 500 companies in hi-tech, biotech, marketing and advertising, online marketing and consumer products industries. Some his past employers and clients include Amgen, Fitch Ratings, Young & Rubicam, Realtor.com, Diageo, Pabst Brewing and Cacique. His expertise centers around long-term planning, streamlining financial operations, financial systems implementations and all aspects of FP&A. Branden received an MBA from Pepperdine.
Categorized in: Financial Planning & Analysis, Manufacturing