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Answer: Ten years ago, my wife and I set up our own food production business, and we enjoy getting to produce the food we love.
However, we still have to wrap our heads around managing our stock. We gave up on carrying out stocktakes several years ago, which hasn’t helped the problem.
We often run out of some products, and we don’t really know what margins we are making as the prices from our suppliers have increased over time.
To be honest, we are not even sure if we are pricing our products correctly. What should we do?
Answer: Stock management is much more than an annual stocktake, and leaving it to snowball into a big, daunting task each year would make you want to look the other way. While carrying out an annual stocktake is vital, efficient stock management is multi-faceted.
The two main causes of decreases in gross profit margin are inaccurate invoicing and non-action in terms of stock price increases from suppliers. Here are measures that businesses should take note of.
Stock accuracy and pricing
Whilst having an accurate stock count is hugely important, identifying discrepancies due to damage, pilferage, or mis-invoicing gives a business real action areas to work on. Crucially, stocktaking should identify slow-moving and obsolete stock and inform you on optimal stock levels to maintain. It also highlights cost increases from suppliers, and you can react quicker and maintain margins.
Stock pricing: A proactive approach to supplier price increases is highly recommended. There is no easy route to managing this. Appointing a person in charge of stock management is prudent to ensure a consistent approach to this area.
In terms of your own product pricing, you need to ensure that you have costed your products fully. A cost calculator can assist you in doing so. By having all raw materials and ingredients listed with a current cost per unit, you will be able to cost your product offering fully and ensure that increases from your suppliers are updated on an ongoing basis.
Supplier pricing
When suppliers increase their prices, you may not always need to raise your prices accordingly.
Instead, you may decide to renegotiate with your current suppliers or source an alternative supply of certain products. This is much easier said than done, however, and having a member of your team take charge of this area will ensure that you continue to source quality products at optimal prices.
Invoicing accuracy: Many food production businesses accommodate short-notice ordering from business customers daily. Orders are often fulfilled in a short time frame and vary from day to day. Ensuring that sale orders are centrally managed and translated into accurate invoicing is crucial.
Cash flow and profit: Taking the above steps will improve cash flow management and increase your gross profit margin.
Maintaining profit margins, managing out-of-date stock, reducing the risks of stock loss and pilferage, and optimising your key product stock levels are vital.
How to price your products: For many businesses, price reviews can be sporadic or even just reactionary to cost increases. Typically, you will see various pricing strategies muted, namely cost-plus pricing, competitive pricing and value-based pricing. However, in reality, a pricing strategy should be dynamic. It is important to consider:
1. The value of your products in the open market – review your competitors’ pricing and compare quality and shelf appeal. Premium quality can attract premium pricing.
2. The gross margin – assess if your current gross margin is sufficient to cover all overhead costs and achieve your desired returns. Having a product costing calculator is crucial to achieving this.
Andrew Brolly is senior accountant with ifac, which is the professional services firm for farming, food and agribusiness
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