Every industry has its own unique language. In food manufacturing and distribution, that language can feel especially dense, especially if you’re stepping into the business for the first time or taking on a new role.
To boost your success and make smart operational, financial and compliance decisions, it’s important to understand the lingo.
Here’s a quick guide to some of the most common terms you’ll encounter:
Arm’s-length pricing. A rule that requires related businesses, such as a parent company and its subsidiary, to price their transactions as if they were dealing with a stranger, not an insider. Tax authorities use this standard to ensure related companies aren’t manipulating prices to shift profits across borders.
Batch. A set of food or beverage products made from the same ingredients in a single production run. If there’s ever a quality issue or a recall, batch records are often the first place regulators and manufacturers look.
Chart of accounts. A structured list of all financial accounts used by a business to record transactions. For food manufacturers and distributors, it’s the backbone of your financial reporting.
Co-packer. Short for contract packer, a co-packer is a company that manufactures and packages products on behalf of another brand. Co-packers are used by food businesses that lack the capital or facility space for their own commercial production.
Cost of goods sold (COGS). The direct costs associated with producing a food product, including raw materials, labor and manufacturing overhead. Keeping a close eye on COGS is critical for managing margins in an industry where input costs can shift quickly.
Demand forecasting. The practice of using data and technology to predict future consumer demand for a product. Accurate demand forecasting helps food manufacturers and distributors manage inventory, reduce waste and align production schedules with market needs.
Food and Drug Administration (FDA). The federal agency that sets and enforces the safety standards of food, drugs and other consumer products in the United States. FDA regulations touch nearly every aspect of operations — from labeling and packaging to facility inspections and recalls.
Food broker. An independent sales agent who negotiates transactions between food manufacturers and buyers such as grocery chains, restaurants or distributors. Many food manufacturers may outsource brokers instead of building a full in-house sales team when entering new markets or retail channels.
Freight allowance. A discount offered by a vendor to a retailer in exchange for the retailer picking up product directly from the vendor’s dock or purchasing above a certain volume threshold. Freight allowances are a common negotiating tool in vendor-retailer relationships.
Landed cost. The total cost of getting a product to its destination, including the cost of the goods themselves, freight, customs duties, brokerage fees, fuel surcharges and any other charges incurred along the supply chain. It’s the number every food business needs to know before setting a price.
Less than truckload (LTL). A shipping method in which a manufacturer or distributor ships a smaller quantity of product that shares trailer space with other shippers’ goods. LTL is a cost-effective option for businesses that don’t have enough volume to fill an entire truck.
Lot. A specific quantity of product that is tracked as a single unit for quality control, recall and traceability purposes. Lot tracking is a regulatory requirement for many food categories and is critical in the event of a product recall.
Private label. A product that is manufactured by one company but packaged and sold under a retailer’s own brand. Examples include Great Value at Walmart or Simply Balanced at Target where the product comes from a manufacturer, but the retailer owns the brand on the label.
Spoilage. The deterioration of ingredients or finished products to the point where they are no longer safe or fit for consumption. Managing spoilage through proper inventory practices, expiration date tracking and first-expired-first-out (FEFO) protocols is a constant operational and financial priority in food manufacturing.
Supply chain. The full network of suppliers, manufacturers, distributors and retailers involved in getting a product from raw ingredient to end consumer. For food manufacturers and distributors operating across borders, a disruption anywhere in that chain, like a port delay or a supplier failure, can ripple through your entire operation.
Tariff classification. The process of assigning a standardized code to a product for customs and trade purposes. Getting tariff classifications right is critical for food importers and exporters, as errors can result in unexpected duties, penalties or shipment delays.
Transfer pricing. The method by which related entities within the same corporate structure, such as a U.S. parent and a foreign subsidiary, set prices for goods, services or intellectual property exchanged between them. Transfer pricing is subject to strict regulatory oversight and must be documented carefully.
United States Department of Agriculture (USDA). The federal agency that develops and enforces laws related to farming, food safety and rural economic development in the U.S. USDA regulations can affect everything from product labeling and facility standards to import and export approvals.
A CPA who speaks your language
Knowing the language is step one. But knowing how it impacts your bottom line is where a knowledgeable advisor can help. Magone & Company works with food manufacturers and distributors to lend real, hands-on experience in your industry. Reach out for more information.
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.