The CFO'S Perspective

Import shipping from Asia has become a nightmare. According to McKinsey & Company, shipping costs for a 40-foot container have increased over five-fold in 2021, from $2,000 per container to $13,000. Container ships that finally arrive on the West Coast often have to wait offshore for a dock to open to offload their cargo. Once unloaded, containers can spend days or weeks in the Port of Los Angeles, Port of Long Beach, or Port of Seattle until rescued by a truck or intermodal train.

This article is specifically focused on the issues and problems that a significant sales increase (30% plus increase due to activities such as a new product line, a new distribution channel, or a major new customer) can have on the existing organization that could potentially offset the gains from the increased sales if not properly addressed or anticipated.

When there is such a profound change in an organization due to significant growth, there are many ways this anticipated windfall can turn into an albatross and bring a company to its knees or reduce the anticipated benefit of profit.

I am taking an accountant’s approach to understand the impact of a significant increase in sales can have on an organization. I will take you through the components of an income statement and balance sheet to discuss how each line item can be adversely impacted by a seemingly windfall in sales and profits.

On November 15, 2018 CAMPS (Center for Advanced Manufacturing Puget Sound) celebrated the successes and achievements in manufacturing in the Puget Sound region.  Regence, Capital Benefit Services and Shannon & Associates sponsored the fabulous event. The emcee for the evening was Randy Gardiner, President of CAMPS Board of Directors.

Members of the CFO Selections team were in attendance. We were again impressed by the character and expertise of the attendees and those recognized with awards (both past and present). CAMPS continues to stand out as a valuable organization we recommend.

This is an important event because it recognizes companies and people who are remarkable and often go unnoticed. Their commitment is not a headline in a tweet or newsfeed. 

As a CFO, one of the common reasons I am brought into a manufacturing organization is to solve the mystery of “Why our sales are growing, but profits low?”  Most of the companies I work with have rigorous quoting processes that they assume will protect them financially, but in the end their actual monthly profit margins often fall short of quoted (and anticipated) profit margins.

Before diving into an examination why profit margins lag behind sales growth projections it is important to take a look at accompanying financial reports. These are categories from a simplified manufacturing income statement:

In this article we will discuss materials, direct labor and manufacturing overhead as they relate to gross profit.