Generating Profit in a Competitive Market: The Importance of Tracking Product Costs and Margins

Q: I have a consumer packaging goods business. Although we have gained significant traction, we are struggling right now with rising costs and a challenging competitive space. What can we do to improve our profits?

When I worked on the Global Finance team at McCain foods, I got first-hand experience with financial operations for a multi-billion-dollar food company. I learned that the key to their success had a lot to do with managing product costs. At McCain, we continuously tracked and managed the cost of making a single french fry, and we had to make sure the cost and margins stayed consistent, day-to-day, country-to-country.

From this experience, I can confidently say that the key to remaining resilient as a product-based business, is to track your product costs and profit margins on each and every product and continuously manage your margins. This isn’t groundbreaking or hard to do, but I see that this process gets overlooked in smaller or earlier-stage businesses.

As Peter Drucker famously says, “You can’t manage what you don’t measure” - and this rings true for product-based businesses. If you are selling a product, at least 50% of the money you bring in, goes back into making more products. Therefore if you can’t increase your prices and you want to increase your profits, you will have to manage your product costs.

The devil is in the details

To understand your product cost and margins, there needs to be a detailed costing and inventory system in place - and the best place to do this is in your bookkeeping software. You don’t need to implement a fancy or expensive ERP system if you can’t afford one. Instead, start by uniformly categorizing all your input costs, and allocating them to specific products or product lines. You should implement a regular inventory counting process and update your books with the value of your inventory based on this count. This will allow you to know how much is sitting on the shelf, and how much you have sold in a given time.

Assessing your margins

The above data will give you the ability to pull reports and run the numbers on your total sales, cost of goods sales, and profit margins for any given period. Once you have data to analyze, the next step would be to build in a process to continuously review your margins, compare them to each other, compare them to industry averages, and make changes in your business accordingly ("managing your costs and pricing")

The results will follow

When my clients see actual data in front of them about their product costs and profit margins, they begin to take actionable steps to improve their profit margins. Over time, we see the results of this work - higher profit margins, and higher overall profits year-over-year.