The primary driver behind most expansion plans is the goal of increasing sales — with the hope that profits will follow.
But before adding production lines, investing in cold storage or launching new products, you need to understand the profit implications.
In some cases, an expansion plan boosts sales volume but not profits. You wind up investing more capital, managing more complexity across borders and working longer hours for minimal returns. You may think, “If we can just get more containers out the door, the profits will follow.” But the reality can tell a different story.
To prevent costly mistakes, here’s a strategic framework to map out your expansion plan:
Understand your cost structure. Break down your costs as either fixed or variable. Fixed costs don’t change regardless of production volume, like facility rent, equipment leases or compliance certifications. Variable costs scale with production and sales. This can include raw ingredients, packaging materials, freight or co-packing fees.
In food manufacturing, this distinction becomes critical. Adding a new production line might seem appealing, but if your variable costs per unit remain high, increased volume won’t necessarily translate to better margins.
Know what each sale contributes. Your contribution margin is what remains from each sale after you cover variable costs. This is what’s left to pay your fixed costs and generate profit.
For example, your specialty sauce sells to distributors. After accounting for ingredients, packaging and distributor margins, you’re left with a modest amount per unit, and that’s your contribution margin. From that remaining amount, you still need to cover your facility costs, equipment, salaries, certifications and everything else that doesn’t change month to month.
Calculate your breakeven point. Your breakeven point is when you reach a sales volume where your contribution margin finally covers all your fixed costs. After you exceed it, you start generating actual profit. But until you hit that threshold, you’re operating at a loss. Understanding this point is especially important in food manufacturing where:
- Seasonal demand can impact when you actually reach profitability each year
- Large upfront inventory purchases can strain cash flow before sales materialize
- International shipping schedules mean there’s often a lag between production costs and customer payment
Achieving profitable growth
Whether it’s investing in your own cold storage warehouse or launching a new product line for a different market segment, how will an expansion affect your cost structure?
Will your fixed costs jump significantly? Will your contribution margin per unit improve, stay the same or potentially decrease? How much additional volume do you realistically need to justify the investment?
The goal is to expand strategically, with a clear understanding of what it takes to make the move profitable. Need help mapping out next steps? Talk to the food industry CPAs at Magone & Company.
This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance specific to your unique circumstances.