The craft beer industry is renowned for its devotion, ingenuity and excellence. However, understanding financial ratios and key performance indicators (KPIs) is necessary to maintain growth and profitability. These metrics provide valuable insights into craft beer businesses’ economic well-being, operational efficiency and overall success. As a business owner in this domain, it is crucial to monitor these critical ratios and KPIs to make informed decisions and attain favorable outcomes.
FINANCIAL RATIOS CRAFT BREWERS SHOULD KNOW
By focusing on metrics a few key metrics, businesses can make informed decisions and improve operations to ensure a flourishing future.
GROSS PROFIT MARGIN
Formula: (Revenue – Cost of Goods Sold) / Revenue x 100
To achieve success, craft breweries need to focus on optimizing their operations. Monitoring the Gross Profit Margin is crucial for financial management. This metric calculates the percentage of revenue that remains after accounting for the cost of producing beer. As such, it provides valuable insights into a brewery’s cost management and overall profitability. By maintaining a higher gross profit margin, craft breweries can boost their profitability and develop competitive pricing strategies. In our experience working with craft brewers, the right gross margin for typical channels of a craft brewery business would include 60 percent for draft beer, 40 percent for packaged beer and 75 percent for taproom sales (beer only, no food).
INVENTORY TURNOVER RATIO
Formula: Cost of Goods Sold / Average Inventory
Craft breweries should prioritize their inventory turnover ratio and aim for about four turns annually. This metric indicates the speed at which a brewery sells its inventory over a specific period, a critical factor in maintaining freshness and variety. It enables craft brewers to ensure that their production and distribution processes are efficient and minimizes the risk of unsold or outdated stock. A higher inventory turnover ratio signifies a successful brewery that meets its customers’ demands.
DAYS INVENTORY ON HAND (DIOH)
Craft breweries, especially those involved in distribution or wholesale sales, should pay close attention to this important business sales operation metric. DIOH measures the amount of inventory available for distribution based on past sales data before completely being depleted. Understanding it can help a craft brewer measure the efficiency of their inventory management practices. It can also reveal instances of inefficiency and even channel-stuffing, which implies overselling into a particular client or market. Having too low a DIOH can encourage the brewer to react quickly and produce more if necessary to supply the channel. On average, a good DIOH would be about 90 days, but smaller breweries may have difficulty meeting this due to their scale and lack of sophisticated logistics skills. In conclusion, maintaining a healthy DIOH level can help build a competitive advantage and enable the producer to react more quickly to changes in stock levels.
DEBT-TO-EQUITY RATIO
Formula: Total Debt / Total Shareholders’ Equity
To evaluate a craft brewery’s financial performance, it is important to look at the debt-to-equity ratio. This ratio shows the balance between borrowed funds and equity. A lower ratio is better because it means the brewery is more financially stable. Monitoring this ratio can help breweries prepare for economic changes and avoid financial risks. A higher ratio, on the other hand, means there is more financial risk and potential instability. For a craft brewery, a ratio of 1:1 is reasonable, but it is more important to measure the period-over-period change and look for positive movement. It is also important to understand how the company is capitalized and to measure this over multiple periods, not basing it on a single period. By doing financial risk analysis, breweries can make smart decisions that help them grow and stay sustainable.
KEY PERFORMANCE INDICATORS CRAFT BREWERS SHOULD CONSIDER
KPIs can provide crucial insights into the effectiveness of marketing and pricing tactics, helping craft beer businesses stay ahead of the competition in a constantly evolving market.
RETURN ON INVESTMENT
Formula: Net Income / Cost of Investment x 100
Craft breweries can significantly benefit from utilizing the return on investment (ROI) KPI to meticulously evaluate the success and profitability of their investments. By gauging the return generated in relation to the cost of investment, breweries can acquire vital insights into their financial performance, enabling them to make informed decisions regarding their growth trajectory. A 'good' return for an owner of a craft brewery, at a minimum, can be compared to the average stock market yield of around 8 percent. It is also important to consider the expectations of outside investors as they may desire a higher rate of return.
REVENUE PER BARREL
For craft beer businesses, analyzing the revenue per barrel can provide crucial insights into their pricing strategy. This key performance indicator allows breweries to calculate the average revenue generated from each barrel sold, providing them with a clear picture of the effectiveness of their pricing and marketing tactics. While this measure will be affected by the brewery’s pricing mix, an average revenue per barrel of about $300 would generally be considered a good result. By consistently monitoring this metric, craft beer businesses can make informed decisions that can impact growth and long-term success. Ultimately, attention to detail in these areas can help breweries stay ahead of the competition and thrive in a constantly evolving market.
Financial ratios and KPIs are essential tools for any business. By keeping an eye on these metrics, craft beer business owners can gain visibility into their finances and make well-informed decisions to plan for success.
To learn more about how breweries can set themselves up for success, contact GHJ’s Food and Beverage Practice.
