As a beverage manufacturer, you know that knowing your true production costs is critical to determining your overall financial health and operational efficiency. Costs fluctuate, which means your profit margin does too. If certain products consistently underperform or if the expense of production outweighs the long-term value to your company, then a change in strategy may be necessary.
COGS, or the cost of goods sold, plays a vital role in understanding your efficiency and profitability. When subtracted from sales revenue, it determines your company’s gross profit (a metric that uncovers how well you balance costs and productivity). Knowing these numbers is important, but knowing how to calculate them is even more important.
When spreadsheets don’t cut it, beverage ERP steps in. But how does it all come together, and is determining costs really as easy as it seems? Let’s dive in.
What is COGS and How Does it Impact Beverage Production?
COGS represents the direct costs and expenses that can be attributed to the production of items sold during a set period of time. For your bev-alc business, that includes raw materials, labor, packaging, equipment and other manufacturing overhead costs.
When breaking it down for bev-alc producers, raw materials come first. These typically encompass everything from grains, yeast, hops or grapes to mineral water, sugar, botanicals and other flavor enhancers. As we all know, the price of these materials can fluctuate based on any number of factors, so it’s important to carefully track and record costs with each purchase.
Labor costs are also a key component when calculating COGS for beverage production. This metric typically includes salary, wages, benefits, employment tax and insurance.
Other overhead items that need to be accounted for in your calculations vary, but the cost of utilities for running production facilities, rent or mortgage for the building, depreciation on the machinery used, packaging and shipping materials, and any other direct costs associated with creating a finished product should all be included.
Why Accurate COGS is Critical to Your Business Strategy
The importance of COGS extends beyond merely assessing the cost of producing a specific beverage; it also impacts pricing strategy. Miscalculations can lead to undercharging for a product, impacting overall profitability. Overestimating COGS might lead to overpricing, which can affect your market competitiveness.
Well-managed COGS also contributes to a beverage company’s financial sustainability and helps producers make informed decisions about the future. It can help you identify when it’s beneficial to scale production or if you need to renegotiate supplier contracts to reduce raw material costs. It provides a clearer picture of your financial health, as well as pinpointing practical cost control measures to implement.
California-based HenHouse Brewing Company knows firsthand how cost analysis impacts its day-to-day production and business strategy. “Actually understanding what drives cost in beer empowers us to make decisions around that, make investments around that, and to create more profitable beer in the long term,” stated CEO and Co-founder Collin McDonnell.
Having a precise understanding and accurate calculation of COGS is vital for any bev-alc business. It allows for improved pricing, better profit-margin realization and an overall increase in the financial sustainability of your business.
Common Challenges When Calculating COGS for Beverage Production
There are some unique challenges for bev-alc businesses trying to accurately calculate production costs. If handled incorrectly, it can lead to significant consequences on financial statements and an inaccurate picture of where your company stands.
Two primary challenges include:
- Variability in raw material costs: Raw materials used in bev-alc production, such as grains, grapes or hops, can experience price fluctuations due to factors like weather conditions, market demand and supply chain disruptions. It can often be challenging to accurately predict and calculate the cost of raw materials for each batch.
- Complexities of production processes: Bev-alc production involves intricate processes, including fermentation, aging, blending and bottling. Each step requires skilled labor, involves multiple overhead costs, and can be influenced by factors like equipment efficiency, production volumes and quality control standards. Production complexities and inefficiencies add to the difficulty of accurately determining the labor and overhead costs directly tied to your products.
How Inaccurate Data Affects Your Business
Errors in COGS calculations can have far-reaching consequences on a beverage company’s financial statements and overall performance. Some key impacts include:
- Inflated or deflated profit margins: Inaccurate COGS calculations can lead to incorrect profit margin calculations, giving a false picture of a company’s profitability. Overstating COGS can result in lower profit margins, while understating COGS can create the illusion of higher profitability. Both scenarios can misguide business decisions and hinder financial growth.
- Misrepresentation of financial health: COGS is a vital component in determining the financial health of a beverage company. Inaccurate cost calculations impact financial ratios, such as the gross margin, operating margin and net margin, which provide insights into a company’s profitability and efficiency. Misrepresenting these ratios can mislead investors and lenders, potentially affecting access to capital or M&A opportunities.
- Compliance issues and legal ramifications: Accurate COGS calculations are essential for tax reporting, financial audits and regulatory compliance. Errors in reports can result in incorrect tax filings, misstated financial statements and potential legal implications such as penalties, fines or reputational damage.
It is essential to the viability of your bev-alc business to have accurate cost calculations of each product you make. If you don’t know how much you are putting into a product, then you don’t know it’s true worth to your bottom line. Having the right tools in place to accurately define production costs and a comprehensive solution to tie each segment of your business together could be the make or break component of your business.
How Beverage ERP Software Simplifies Cost Analysis
Beverage ERP software streamlines the complex process of calculating COGS for beverage producers. Systems like Crafted ERP offer a range of functionalities specific to cost analysis for the beverage industry and enable accurate and efficient cost management.
Benefits that ERP solutions provide beverage producers include:
- Inventory management: Beverage ERP software offers robust inventory management capabilities that track raw material usage, production outputs and finished goods. Whether in materials storage, on the production floor or in an office, your team can accurately capture the cost of materials used in production, ensuring a true representation of costs.
- Procurement optimization: ERP solutions streamline the procurement process by automating purchase orders, managing supplier relationships and facilitating cost comparisons. Improved procurement practices help control material costs, minimizing pricing fluctuations and maintaining consistency in COGS calculation.
- Production tracking: Beverage ERP software tracks and records production activities, including labor hours, equipment usage and manufacturing overheads. This data is automatically integrated into calculations, and provides you with visibility into the precise costs incurred during the production process.
Bev-alc businesses all over the world have greatly benefited from the automation and integration of the many pieces of the product costing equation. By having a single solution that includes accounting, production, inventory management, raw materials tracking, among other business processes, you can accurately track and predict costs, which ultimately drives profitability.
Using Crafted ERP As Your Costing Hub
When it comes to understanding costs, beverage ERP systems serve as a central hub for accurate and efficient data. Crafted ERP includes all the tools you need to track raw material usage and finished goods, manage inventory and optimize procurement processes, facilitate cost comparisons and supplier management, and analyze the cost of labor and manufacturing overheads. By leveraging these features, beverage producers can attain more accurate COGS calculations, optimize pricing strategies and improve profit margins.
Do you know what it costs to make your beer, wine, spirits, cider or RTD beverage? If you struggle to understand production costs or grapple with inaccurate data, reach out to our team for help. We can sit down with you and evaluate what your business needs to enhance your overall financial health.
