Understanding Basic Financial Theory for Food SMEs: A Sweet Potato Chip Case Study

To run a successful SME, a solid understanding of basic financial theory is essential. Knowledge of key concepts like the Cost of Goods Manufactured (COGM), Break-Even Point (BEP), Return on Investment (ROI), and Payback Period (PB) allows entrepreneurs to analyze and manage their business finances more effectively.

As part of its commitment to supporting small and medium-sized enterprises (SMEs), Magfood regularly provides valuable insights through seminars and training. This time, Magfood will break down these fundamental financial theories using a practical case study of sweet potato chip production, as presented in the Magfood Snack Production Entrepreneurship Training. This guide is designed to be directly applicable for food SME owners.

1. Cost of Goods Manufactured (COGM)

COGM (also known as Cost of Production) represents the total cost incurred to produce goods that are ready for sale, including all raw materials and packaging. Calculating COGM is critical as it serves as the baseline for setting your selling price and determining your profit margin.

COGM Example: Sweet Potato Chips
In our sweet potato chip production example, the costs for raw materials are as follows:

COGM per kilogram of sweet potato chips: IDR 27,320.
If we add a plastic packaging cost of IDR 2,500, the total COGM per kilogram becomes:

Total COGM per kg = IDR 27,320 + IDR 2,500 = IDR 29,820

2. Selling Price and Gross Profit

To calculate gross profit, your selling price must be higher than your COGM. For example, if the selling price per kilogram is IDR 70,000, the gross profit is calculated as follows:

Gross Profit = Selling Price – COGM
Gross Profit per kg = IDR 70,000 – IDR 29,820 = IDR 40,180

Gross Profit Percentage = (Gross Profit / Selling Price) x 100%
Gross Profit Percentage ≈ 57.4%

This gross profit figure helps SMEs identify the profit earned per kilogram of sweet potato chips sold.

3. Break-Even Point (BEP)

The BEP is the point at which a business is neither making a profit nor a loss, meaning total revenue is equal to total costs. Calculating the BEP helps business owners determine the minimum sales volume required to avoid losses.

How to Calculate BEP:
BEP (in sales value) = Fixed Costs / [1 – (Variable Costs / Total Sales)]

From our case study:

• Fixed Costs: IDR 8,295,542
• Variable Costs (Total Production Cost): IDR 19,951,182
• Total Sales: IDR 43,541,667

The BEP calculation is:
BEP = 8,295,542 / [1 – (19,951,182 / 43,541,667)] = IDR 15,311,330

This means the break-even point is reached when sales revenue hits IDR 15,311,330. Knowing your BEP allows you to set clear sales targets.

4. Return on Investment (ROI)

ROI measures the profitability of an investment relative to its cost. A higher ROI indicates that the investment is generating returns more efficiently.

ROI Formula:
ROI = (Total Sales – Total Investment) / Total Investment × 100%

In the sweet potato chip example, the total investment is IDR 7,093,000, and total sales are IDR 43,541,667.
ROI = (43,541,667 – 7,093,000) / 7,093,000 × 100% ≈ 514% (Correction from original article’s calculation)

This ROI shows the return generated from the initial investment over the calculated period, helping you assess whether an investment is worthwhile.

5. Payback Period (PB)

The Payback Period is the time it takes for a business to recover its initial investment through the profits it generates. A shorter PB is always better.

PB Formula:
PB = Total Investment / Net Profit

From the case study, the total initial investment is IDR 7,093,000 and the monthly net profit is IDR 15,294,943:
PB = 7,093,000 / 15,294,943 ≈ 0.46 months

With a Payback Period of approximately 0.46 months, the initial investment can be recovered in less than one month.

6. Gross Sales vs. Net Sales

Gross Sales is the total revenue from all sales before any discounts or returns. Net Sales is the revenue remaining after subtracting discounts, allowances, and returns. For SMEs, offering discounts is a key marketing strategy, but it’s crucial to manage them carefully to protect profit margins.

7. Gross Profit vs. Net Profit

Gross Profit is calculated by subtracting the total production cost (COGM) from total sales.
Gross Profit = Total Sales – Total Production Cost
Gross Profit = 43,541,667 – 19,951,182 = IDR 23,590,485

Net Profit is then calculated by subtracting fixed costs from the gross profit.
Net Profit = Gross Profit – Fixed Costs
Net Profit = 23,590,485 – 8,295,542 = IDR 15,294,943

Net Profit Percentage:
Net Profit (%) = (Net Profit / Total Sales) x 100%
Net Profit (%) = (15,294,943 / 43,541,667) x 100% ≈ 35.13%

Understanding these financial fundamentals provides a clear picture of your business’s health, from production costs and profitability to investment efficiency.

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Custom Formulation and Private Label Services
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Magfood Coaching Clinic: Mentorship from Experienced Practitioners
Magfood provides a coaching clinic service to help you grow your food business. Get expert guidance on product development, financial planning, and more.

• 90-minute one-on-one sessions (online or offline).
• Contact 0855 8800 780 or 0811 1397 161 for details.

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