8 metrics you need to know to run a craft business
Running a brewery, cidery, or winery is complicated. You have to be an expert in brewing or winemaking and an expert in small business management. And while you may have gotten into it for the love of beer or wine, you’re still responsible for everything else that comes along with running a successful business.
We know there are a lot of acronyms and jargon to understand, especially when it comes to your finances. So, we talked with some of the industry’s leading CPA partners about the common knowledge gaps they see when working with craft producers. Check out the list below for quick definitions of some of the most common abbreviations, buzzwords, and key metrics.
Inventory turnover is a ratio showing how many times inventory has been sold and replaced in a given period. It is an important metric because it speaks to a company’s efficiency. Craft producers need to have enough inventory on hand to make goods and fill orders, but not so much that they are short on cash. With inventory management software, users can run reports to see when and where certain inventory items were used.
EBITDA, which stands for earnings before interest, taxes, depreciation, and amortization, is a modified form of cash flow. This calculation is used by financial professionals to understand how profitable a company is, which can be important when you’re seeking financing from banks or investors.
There are four main components of working capital: cash management, accounts receivable management, inventory management, and accounts payable management. These four components can be tracked in your accounting software, like QuickBooks or Xero, which may integrate with your inventory management software so you can calculate and adjust inventory value, A/R, keg liability accounts, finished goods, and more.
Current Ratio & Quick Ratio
Current ratio and quick ratio both measure a company’s liquidity and its ability to pay obligations when they become due. Where they differ is the factors considered in the calculation. Current ratio includes more factors, such as inventory, while quick ratio does not.
Days in A/R
Days in A/R (accounts receivable) is a measure of how long it takes, on average, to collect money from a sale. This is an important metric for craft businesses because it is a key driver of business cash flow. A/R represents uncollected sales and the goal is to collect as soon as possible to increase cash on hand.
A key factor in estimating recipe costs is the cost of raw materials. Other costs, like packaging, come into play with the total production cost, but it is important to know the cost of producing a recipe on its own.
Finished Goods Cost Per Batch
This metric measures the costs associated with ingredients, packaging, and losses in each batch produced. It provides a baseline to add in overhead costs to identify Total Cost per SKU and to determine which SKUs are most profitable. To find this metric, craft makers need to account for batch cost, recipe cost, production usage, packaging cost, and more, all of which can easily be tracked in your business management software.
Debt Service Coverage Ratio
Debt Service Coverage Ratio is calculated as EBITDA divided by total debt service (interest + principal). It is an important measure that gauges available cash flow and a company’s ability to pay its debts.
How to Get These Metrics
These are just a few of the metrics that are important to understand about your business. In order to make strategic decisions, you need to have access to data to inform your choices. But keeping track of these metrics isn’t easy and would require dozens of complicated spreadsheets. Successful craft businesses have found a better way with business management software that centralizes data and can easily produce reports on key metrics with the click of a button. If you want to learn more about a business management software for craft producers, visit goekos.com.