The 5 Most Important Financial Ratios for Wineries
Financial ratios play a crucial role in managing any business. In the food and beverage industry, where margins can be tight and costs like trade spend impact profits, these ratios offer insights into both the overall and specific financial health of your company.
In this article, we define a limited set of financial KPIs related to all wineries, but it's certainly not an exhaustive list. You can find more information about financial metrics for food and wine entrepreneurs and consider talking to financial professionals if you own your own vineyard or crush facility. You may also want to track additional metrics to help support business decisions and success.
Ratio 1: Gross Margin Percentage
The gross margin ratio measures the amount of profit per dollar you spend to offer your goods. The formula for this ratio is:
(Revenue - Cost of Goods Sold) / Sales
Gross margin helps you understand how much you can invest back into your business. Measuring the ratio by class is important since gross margin can vary significantly in different classes, such as DTC or wholesale. Seeing the breakdown of this ratio across various classes in your business helps you make data-backed financial decisions.
Gross Margin Percentage Example
Consider a hypothetical example. A winery offers a bulk order service for events like weddings. In one month, the winery sells $10,000 in goods via this channel. The cost of goods sold (CoGS) is $7,000. The gross margin calculation would be:
($10,000 - $7,000)/$10,000
$3,000/$10,000
Gross margin equals 0.30 or 30%
How Do Different Sales Channels Affect Gross Margin in Wineries?
It's important to analyze the gross margin of each sales channel separately, rather than comparing them. For example, if you sell directly to consumers in your own tasting room, you're likely to experience higher gross margins than when working with wholesale or retail vendors. By understanding margins across your channels, you can strategically reduce efforts on unprofitable channels, negotiate with vendors to lower costs or create trade spend strategies that enhance brand awareness and increase revenue.
Ratio 2: Year-Over-Year Revenue Growth
Year-over-year (YoY) growth is an important financial ratio when measuring business growth and creating informed strategies for future success. As with gross margin, YoY revenue growth is best measured by channel. If you're using this metric for wholesale, consider breaking it down by distributor and/or broker for the best picture of where your revenue is growing.
The formula for YoY revenue growth is:
(Current year's revenue - Last year's revenue)/Last year's revenue
You'll need to multiply the result by 100 if you want to convert it to a fraction.
YoY Revenue Growth Example
Consider this hypothetical example to understand how year-over-year revenue growth math works: A winery business had a revenue of $150,000 in 2022. In 2023, the revenue was $200,000. The YoY calculation would be:
($200,000 - $150,000)/$150,000
$50,000/$150,000
YoY revenue growth equals 0.33, or 33%
What Insights Does YoY Revenue Growth Provide to Winery Owners?
Combining YoY growth with other metrics can help you assess the overall financial health of your operation. Applying this ratio to individual or distribution channels in a wholesale model provides insights into your revenue strengths, enabling strategic decision-making. For instance, you might invest in channels driving higher revenue growth while investigating channels that have demonstrated slow, no, or reverse growth.
Ratio 3: Shipping Expense Recovery
Shipping expense recovery is a bespoke metric designed for wineries with significant DTC sales. Its purpose is to help you understand how your DTC shipping costs are managed. The ratio allows you to see how much you are subsidizing customer shipping costs, as this expense can get away from boutique wineries that don't monitor it.
The calculation for this metric is:
DTC shipping income/DTC shipping expense
Shipping Expense Recovery Example
If a winery earns $18,000 in DTC income in a specific period and has $5,000 in shipping expenses, the ratio is:
$18,000/$5,000
3.6
How Does Low Shipping Expense Recovery Impact Profit?
The higher the shipping expense recovery ratio, the better, as this means you're subsidizing less of the customer's shipping expenses. Obviously, that's a cost reduction that can increase your profits. If your shipping expense recovery ratio is decreasing, you may need to review your pricing strategies and how you charge customers for shipping. However, you'll want to find a sweet spot between a high shipping expense recovery ratio and positive customer satisfaction that results in ongoing orders.
Ratio 4: Days Inventory on Hand
The days inventory on hand metric measures how many days you can keep selling at current volumes without running out of inventory. This metric provides valuable insights, such as identifying inventory provisioning needs or highlighting specific SKUs for marketing campaigns.
The formula for days inventory on hand is:
Average inventory/(CoGS/days in accounting period)
Days Inventory on Hand Example
This ratio is less intuitive than the previous items on our list, so let's look at a real-world example to better understand it. Imagine a winery with a tasting room. The tasting room has $100,000 in average inventory on hand. The average cost of goods sold for the past 3 months was $50,000 per month. The calculation in this case would be:
$100,000/($50,000/30)
$100,000/$1666.67
Roughly 60 days of inventory on hand
Why Is This Ratio Important to Winery Marketing, Cash Flow, and Customer Satisfaction?
An in-depth understanding of your inventory on hand is critical to multiple business tasks, including:
Marketing. When you're running long on a specific SKU or type of inventory, you can decide to push those products via email or social media. This information also helps you plan promotions or strategic trade spend campaigns.
Cash flow. If your days inventory on hand ratio is consistently high, it might mean you're tying up cash flow in inventory when you don't need to. Check out our winemaker inventory costing guide for more information on inventory costs.
Customer satisfaction. If your ratio always runs pretty low, you may be setting yourself up for customer service issues when you can't appropriately supply orders.
Ratio 5: Inventory Turnover Ratio
The inventory turnover ratio is a measure of how many times you "sell out" and replace your inventory within a given period. For most wineries, a good inventory turnover ratio is one when measuring for an entire year. This indicates you sell your entire previous vintage on the day you're ready to release your next vintage.
The formula for inventory turnover ratio is:
CoGS/The average inventory cost
Inventory Turnover Ratio Example
Consider an example where a winery has $500,000 in CoGS and $400,000 in average inventory for the year. The inventory turnover ratio, in this case, would be 1.25. This means the winery turned its inventory over more than once in the year, which might mean it had to scramble to source inventory toward the end of that period.
What if the winery had $250,000 in CoGS and $300,000 in average inventory? In this case, the ratio is 0.83, which means the winery did not turn over all of its inventory in the year and is carrying some into the next year.
What Strategies Can Help You Improve Inventory Management and Turnover Rates?
Pricing, marketing and inventory management are all important in managing turnover rates. When the turnover rate is low, a business can run marketing campaigns and promotions to increase sales. When the turnover rate is high, especially with a specific product or channel, the business might raise prices or cut back on marketing promotions.
Implementing Financial Ratios for Winery Success
Using these ratios in your business helps you make sound financial, marketing and pricing decisions. Contact Balanced Business Group for personalized financial consulting services to optimize your strategies.
