Sweet Little Lies: the margin problem hiding inside your own business

“We don’t have a margin problem.”

That’s the view that remains available – and hard to defeat – when Australian food manufacturers don’t keep ‘good hygiene’ between their business units.

Time and again, we see food manufacturers that have a foot in the contract manufacturing camp, subsidising the costs of operating their own brands. In the most extreme examples, the contract manufacturing division is transferring product at cost, making it look like a ‘dog’, while the brands appear to be operating on good margins.

This becomes a real problem when management misunderstands what a good price looks like.

Read: Are You Pricing Your Products Correctly?

The brands business appears to be achieving the right sort of mark-ups. It’s locking in arrangements that seem to be on favourable terms. But all the time, it is lying to itself about its real costs. It is acquiring product at a subsidised price – a price it could not achieve if it was merely a customer of some other contract manufacturing business.

These really are two separate businesses within a business. And they should be accounted for as such. That makes cost allocation important. It makes the transfer price important. And it promotes the right pressures, the right accountabilities internally. No more finger pointing. No more ‘sweet little lies’.

Read: More Revenue, Less Money. Sound Familiar?

If this is happening in your business, you will be underperforming. The good news is it can be fixed. Clarity creates focus. Focus drives performance.

But you have to invest in a more sophisticated finance function. A function that turns data into information, the type of quality information that you can rely on, that you can use to make good, clear-eyed decisions at every level of your business.

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If this is something you’re missing, give us a call on 1300 656 141 or if you prefer, email us. We’ve fixed this issue for other food manufacturers, and we can fix it for you.