Dreaming of The Alaskan Wilderness to: The CFO Version

Taking a new job as the CFO of a fish processing company in Alaska has been an exhilarating transition from Silicon Valley.? Yes, it’s a dream but it gets real with the details so bear with me. Drawn by the opportunity to live in the wilderness and embrace the rugged beauty of the Last Frontier, I now oversee the finances of a thriving operation that catches and processes seafood, sells premium finished products, and even monetizes by-products. My focus is clear: maximizing gross margins and profits while navigating the complexities of manufacturing from raw materials.

This transition from a resale model to an in-house production model brings unique challenges in inventory costing, production cost allocation, and selecting the right ERP system. Here’s how I’ve approached these critical decisions.

Inventory Costing: The Foundation of Profitability

In the fish processing business, choosing the right inventory costing methodology is crucial. With fluctuating raw material prices and multiple SKUs, I needed a system that accurately reflects the value of inventory and optimizes cost management. And these things are perishable! Here's what I considered:

1. FIFO (First In, First Out): This method matches the actual flow of perishable goods like seafood and ensures older inventory is sold first, minimizing spoilage risks. It also aligns with rising input costs by reducing the taxable income impact during inflationary periods.
2. Weighted Average Cost: Simplifies inventory valuation when raw material costs fluctuate. By averaging costs, it provides consistency across SKUs without tracking each batch’s specific cost.
3. Standard Costing: Establishing benchmarks for raw materials and labor costs allows for variance analysis and targeted improvements in production efficiency.

After evaluating the options, I choose FIFO for its alignment with our operational realities and its straightforward tax implications.

Joint Products vs. By-Products: Cost Allocation for Maximum Profitability

In our production process, the scraps left over from filleting and processing seafood are sold as fishmeal and other by-products. Classifying these outputs correctly has a significant impact on cost allocation and profitability:

• Joint Products: If by-products represent a substantial share of revenue, treating them as joint products ensures costs are allocated proportionally based on their relative market value.
• By-Products: For less significant outputs, a simpler method allocates minimal costs based on their net realizable value (NRV), effectively reducing the cost of primary products.

Given that our by-products contribute meaningfully to revenues, I opted for a joint product approach to maximize transparency and allocate costs fairly across our product lines.

Production Cost Allocation: Precision Matters

Accurately allocating production costs ensures the profitability of each SKU. Here’s the system I implemented:

1. Direct Costs: Labor, raw materials, and packaging are directly tied to each SKU.
2. Indirect Costs: Overhead like utilities, maintenance, and administrative expenses are allocated based on drivers such as machine hours, processing time, or product weight.
3. By-Product Revenue Offsets: Revenue from scraps and other by-products reduces overall production costs, boosting gross margins for our primary products.

This granular approach ensures a clear understanding of where our money goes and highlights areas for cost optimization.

ERP Selection: The Backbone of Operational Efficiency

The right ERP system is essential for tracking inventory, managing production workflows, and driving data-informed decisions. For our small to medium-sized business, I evaluated solutions that balance functionality, scalability, and affordability:

1. NetSuite: Offers robust multi-SKU inventory management, production scheduling, and financial reporting but comes at a higher cost.
2. Microsoft Dynamics 365 Business Central: A flexible option for SMBs transitioning to manufacturing, with excellent financial integration and ease of use.
3. Fishbowl Manufacturing: A cost-effective choice for inventory-heavy workflows, integrating seamlessly with QuickBooks.
4. SOS Inventory: Designed for smaller businesses, SOS Inventory is an affordable, user-friendly tool for managing inventory, production, and by-products. Its seamless integration with QuickBooks makes it particularly appealing for a company like ours.

Ultimately, I chose SOS Inventory for its affordability, ease of implementation, and ability to support our transition to in-house production. As we grow, scalability to a more comprehensive ERP like NetSuite remains an option.

Key Takeaways for Finance Leaders

For CFOs navigating similar transitions or looking to optimize manufacturing operations, here are my recommendations:

1. Understand Your Business Dynamics: Inventory costing, cost allocation, and ERP selection must align with your operational realities.
2. Prioritize Data Accuracy: Granular tracking of production costs ensures informed decision-making and better profitability.
3. Choose Scalable Solutions: Start with tools that meet your current needs but allow room for growth.

The journey from Alaska’s wilderness to the world of fish processing has taught me that financial optimization is as much about strategic decisions as it is about embracing complexity. By leveraging the right tools and methodologies, I’m confident we can continue to scale profitably while honoring the integrity of our process and products.