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If you are a winery owner, you may have questions such as, “Do we need to hire more labor?” “Should we buy more equipment?”, “Do we have enough cash to buy equipment”, or “Should we take out a loan?” To begin to answer these questions, winery owners should consider Key Performance Indicators (KPIs).
KPIs are assessments which can be used to provide insight into the health of a business. They can be quantitative or qualitative. Quantitative KPIs for wineries include labor-to-sales ratio, cash flow to capital expenditure ratio (CAPEX ratio), and the debt service coverage ratio. Qualitative KPIs include customer satisfaction and customer traffic.
Quantitative KPIs measure performance by the numbers, such as the labor-to-sales ratio. This ratio is calculated by dividing the labor cost by the total sales within a period. The ratio shows how much labor dollars went into producing those sales, and the lower the ratio, the more efficient the labor. Determining what your winery labor-to-sales ratio should be requires judgement and consideration and depends upon the size and location of the winery. If your labor-to-sales ratio seems too high, some ways to improve it would be to make sure employees are receiving enough training, making sure employees are properly scheduled, and considering if you have enough employees so that you can help prevent burnout. Direct labor is a crucial part of total production costs, directly affecting metrics like the cost of goods sold (COGS) and overall profitability.
Wineries should also keep and maintain adequate equipment that laborers need to operate the winery. While making sure employees have the equipment they need, winery owners should consider the CAPEX ratio, which measures if the company has enough cash flow from operations to be able to purchase equipment. The ratio is calculated by the cash flows from operations divided by the amount of fixed assets purchased in a period. A ratio of less than 1.0 means the fixed asset purchases exceeded cash flow from operations. If the ratio is more than 1.0, the n all fixed asset purchases were able to be funded by cash flow from operations. Determining the acceptable CAPEX ratio depends on the goals of the winery owner. If the goal is to grow the company, then a lower ratio may be desired as equipment and assets are purchased to expand operations. On the other hand, if the owner desires to pay down debt and has enough assets to meet current operational demand, then a higher ratio would be appropriate. Paying down debt would also affect the debt service coverage ratio. The costs incurred in purchasing equipment significantly impact financial planning and should be carefully tracked.
The debt service coverage ratio divides earnings before interest, taxes, depreciation, and amortization (EBITDA) by current liabilities to measure if earnings were enough to cover current payment obligations. A ratio of 1.0 indicates the company has earned $1 for each $1 of current liabilities. If you have a low ratio, below 1.0, it may indicate you aren’t generating enough cash to cover current payment obligations, and it would probably be best to wait until the ratio increases to take on any additional debt. The ratio can be raised by increasing income or decreasing debt.
While it is easy to focus on the numbers such as the debt service coverage ratio, it is also important to focus on qualitative KPIs such as customer satisfaction and customer traffic. Having higher customer satisfaction would draw in more repeat customers and additional customers from word of mouth. Bringing in more repeat customers and additional customers would help improve the previously mentioned Quantitative KPIs. Hosting live music, entertainment, and events in a tasting room or on the winery property can draw in additional traffic and provide a better experience to customers. Customer satisfaction can be measured using short surveys provided to customers on site. To increase customer satisfaction and traffic, wineries should focus on service, the purchasing experience, and appearance.
The service a customer experiences depends heavily upon the person serving the customers. Having a server knowledgeable about the wine, food pairings, and all the offerings goes a long way in helping them interact with customers in a positive way. Make sure to identify the popular wines and offerings and have enough on hand to serve customers to ensure a positive purchasing experience. Customers won’t be as happy if you run out of their favorite wine. The appearance of the winery and tasing room also contributes to customer satisfaction. Most customers are at the winery to unwind, relax, and drink wine while socializing. The atmosphere of the tasting room should lend itself to these qualities.
KPIs can assist winery owners with operating their winery. They can help guide decision making by providing insight into the financial performance of the winery. Quantitative KPIs provide numerical measurements and can help make decisions related to employees, equipment, and loans. Qualitative KPIs focus on nonnumerical data such as building positive experiences with customers. If you are looking to improve the results of your winery, using KPIs such as these can guide you to achieve better performance.
To contact a member of HBK Manufacturing Solutions, please contact us at 330-758-8613 or manufacturing@hbkcpa.com
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