Introduction to Key Metrics – Part 1
We recently had a new client approach us with some questions on how they could measure whether their business was heading in the right direction. They have a store front florist business with a focus on events but special occasion gift baskets were starting to make a significant contribution to their revenue. They felt it would be a good time to start trying to understand where their revenue was coming from and how profitable each revenue stream was.
We were very pleased to help them understand their Financial Statements better and to provided them with the tools that would help with the analysis.
We started by making a few changes.
- Modified the chart of accounts to tailor it to their business. This makes reporting on key metrics easier.
- Set up classes in their software (QB) to facilitate reporting on events.
- Established procedures to ensure that all financial data was accurate and timely.
- Did research on their industry which provided benchmark information. One resource is the Government of Canada website’s key performance data http://www.ic.gc.ca/eic/site/pp-pp.nsf/eng/home
- Scheduled monthly reporting and set up an excel spreadsheet to track the results.
Monthly analysis obviously provides very useful information but the real magic comes when you are able compare against prior periods, your competitors and work on forecasting.
Gross Profit Margin
This client wanted to know how profitable individual events were and also wanted to know whether to continue to invest in inventory and marketing for the gift baskets. By setting up classes for the events and revenue and COGS (Cost of Goods Sold) accounts by revenue stream we could calculate the Gross Profit Margin for each separately. We also wanted to track revenue that came from wire services so that fees could be associated to those revenues directly.
Revenue – Cost of Goods Sold
Gross Profit Margin measures your ability to turn your services and products into a profit. The higher this number is the better.
Inventory Turnover Ratio
This client has a great handle on their purchasing for events and had no concerns with floral stock inventory but they needed to know whether they should be making changes to their purchasing practices for the gift basket business.
Cost of Goods Sold
Inventory Turnover Ratio provides an indicator on how well your inventory is being managed. This demonstrates, for a given period of time, how often your inventory is sold and replaced. The higher the ratio the better. Better precision is achieved by adding additional accounts to track perishable and non-perishable inventory.
Regular financial statement analysis is a powerful tool in improving your business and helping you make critical decisions. Using key metrics is an easy way to establish goals, follow trends and gauge results.
If you would like to have a conversation about your business, contact us - we love helping with the analytics!
App Alert - Curate
One last note for our floral clients. We saw a demo recently of a great app from Curate https://curate.co/
Curate can be used to create proposals, generate wholesale orders, manage events and reduce inventory wastage. Also, it has a nice integration with QBO for vendor orders. Take a look !
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