Unit Costing for Food and Beverage Businesses
Every healthy company needs healthy profits.
It’s a lot of hard work building something from nothing. Profits are the engine that keeps the company moving and the reward for your hard work. But how can you make sure you’ve built in the right pricing and supply chain costs? One method is unit costing. You need to make money on every unit you sell, and unit costing will ensure that you do. Never done it before? Our friend and guest blogger Mike Simon, from Green Light Launch, has a handy spreadsheet:
|Table 1: Typical Unit Costing Sheet|
|Total Fixed SG&A||$0.23|
Unit Costing COGS:
Let’s start at the top. What price are you selling at? That’s your gross revenue. Do you expect to pay any discounts like payment terms (2% 10, net 30 is common)? Whatever percent those are, multiply them by your gross revenue to get the total promotions/rebates unit cost. Subtracting this from gross revenue yields net revenue.
The next category is COGS. Find how many pounds of each ingredient it takes to make a single unit. Multiply each ingredient usage by the delivered pricing of the ingredient, and then sum them up. Labor cost is how many labor man-hours it costs to make a unit, multiplied by the cost of a man-hour. Next is storage. Divide your monthly storage cost by the number of units you’ll have in storage at any given time on average, and then multiply it by how many months your units sit in storage on average. Freight is the average price per unit that you pay to transport your units to their final destinations.
Finally, inputting all of those numbers and subtracting their total from your gross revenue yields gross profit (also called operating income)! Gross profit divided by gross revenue will give you gross margin. Gross margin should never be below 40% for companies in the food industry. Most companies fall between 40-60%.
Unit Costs of SG&A:
In our spreadsheet, we’ve inputted some sample SG&A (selling, administrative & general) costs. Taking these fixed costs and breaking them down into unit costs is where the true power of unit costing comes in. Start with an estimated unit sales volume projected for the year. Dividing each fixed cost you have by the number of units you are projected to sell gives you the unit cost of each fixed cost. Subtracting all of these from gross profit gives you operating profit also called EBITDA (more on that later!).
The true power of the unit costing is the ability to quickly change your unit projections and see how your business scales. If you don’t have a positive operating income, then you need to revisit your price, your supply chain, or your fixed costs.
Green Light Launch
With nearly a decade in the natural food industry, I use my experience to build strong foundations for brands by focusing on taking them from a product idea to full scale production. By separating the launch into 4 stages, I can focus systematically on each step, at the right time, and customize my approach to what they need help with. We walk through each step together and give them the tools and templates for a complete roadmap of what we need to do to get off the ground!