A MANAGER S GUIDE TO FOOD HUB FINANCES A JOURNEY THROUGH EVALUATING AND IMPROVING YOUR FOOD HUB

Transcription

1 A MANAGER S GUIDE TO FOOD HUB FINANCES A JOURNEY THROUGH EVALUATING AND IMPROVING YOUR FOOD HUB

2 A collabora)on of

3 IN THIS PRESENTATION: 1. FINANCIAL STATEMENTS AT A GLANCE 2. USING BENCHMARKS AND DATA 3. KEY METRICS ACTIVITY 4. RECORDKEEPING CONSIDERATIONS

4 GOALS FOR THIS SESSION Facilitate a conversation about financial measurement Practice using metrics to ID challenges and possible courses of action See how much the external benchmarks can tell us

5 RESEARCH METHODS The information we offer is based on.. A review of literature, conference session recordings etc. on financial evaluation of food hubs and related businesses Four detailed case studies using 3-5 years of financial statements from actual food hubs Interviews and input from over 18 food hub managers and 5 service providers who work with food hubs

6 Kate Danaher, RSF Social Finance Erin Pirro, Farm Credit East Robin Morris, Mad River Food Hub Jesse Singerman, Prairie Ventures LLC Wallace Center at Winrock International

7 Balance sheets Income statements Cash flow statements (which we will not focus on today)

8 1. FINANCIAL STATEMENTS AT A GLANCE Consider the balance sheet from Pete s Produce. What do you notice? What are the business largest assets? How much of the assets are short-term? Long-term? What much of the debt is short-term? Long-term? What strengths do you see? What weaknesses?

9 BALANCE SHEET PETE S PRODUCE DEC. 31, 2014 ASSETS Current Assets Checking/Savings WSB Checking $14,234 Accounts Receivable AR Wholesale $45,353 AR Food Box $1,335 Total Accounts Receivable $46,688 Total Current Assets $60,922 Fixed Assets Accumulated Depreciation -$163,677 Computers and Software $1,564 Equipment and Fixtures $131,356 Leasehold Improvements $12,467 Vehicles $78,733 Total Fixed Assets $60,443 TOTAL ASSETS $121,365 LIABILITIES Current Liabilities Accounts Payable $28,433 Short Term Loan $20,000 Line of Credit $29,928 Total Current Liabilities $78,361 Long Term Liabilities Truck loan $19,480 Total Long Term Liabilities $19,480 Total Liabilities $97,841 EQUITY Retained Earnings $9,430 Shareholder Distributions -$5,460 Net Income (current year) $19,554 Total Equity $23,524 TOTAL LIABILITIES & EQUITY $121,365

10 BALANCE SHEET PETE S PRODUCE DEC. 31, 2014 Strengths: Assets balance with liabilities and equity Positive profit this year and retained earnings from previous years Positive cash balance in the checking account Accounts payable not too high -- probably paying bills on time Weaknesses: Equity balance is small -- highly leveraged, at risk for insolvency Accounts receivable significantly larger than accounts payable possible cash deficit Current liabilities exceed current assets: negative working capital Depreciation is high relative to the value of fixed assets -- equipment and facilities are old or are being undervalued

11 BALANCE SHEET PETE S PRODUCE DEC. 31, 2014 What we still don t know Why does the company have low equity? How might this situation be improved? At what times of year are cash and working capital the most limited? Why are accounts receivable so large relative to accounts payable? How is this affecting cash flow? How productive are the assets that the business owns?

12 1. FINANCIAL STATEMENTS AT A GLANCE Consider the following income statement from Pete s Produce. What do you notice? What are the sources of revenue and how do they compare? What are the gross margins and net income? Which expenses are the biggest? What strengths do you see? What weaknesses?

13 INCOME STATEMENT PETE S PRODUCE JAN - DEC 2014 Income Direct-to-Consumer Revenue $138,350 Wholesale Revenue $1,268,368 Delivery Revenue $5,325 Total Income $1,412,043 Cost of Goods Sold Food Box COGS $81,304 Wholesale COGS $996,440 Inventory Adjustment (shrink) $2,430 Total COGS $1,080,174 Gross Profit $331,869 Expense Credit Card Processing Charges $7,380 Depreciation $27,157 Insurance $2,404 Interest $2,412 Marketing $4,302 Occupancy Costs $31,403 Office Expense $5,430 Packaging $6,430 Payroll Expense $172,404 Professional Services $4,303 Vehicle Expenses $40,045 Write-offs -- Direct to Consumer $7,343 Write-offs -- Wholesale $1,302 Total Expense $312,315 Net Income $19,554

14 INCOME STATEMENT PETE S PRODUCE JAN - DEC 2014 Strengths: Positive net income matches with net income on balance sheet Big gross margin on retail Multiple revenue centers may offer different benefits in terms of profitability, risk management, cash flow Total income above $1 million, better chance of breakeven in long run Low interest expenses COGS, revenue and write-offs tracked on a program-by-program basis Weaknesses: Net income is very small relative to revenue Write-offs are significant, why are customer payments lagging? Not clear what is included in Costs of Goods Sold

15 INCOME STATEMENT PETE S PRODUCE JAN - DEC 2014 What we still don t know How do sales, gross margins and net income compare to goals? Are there some programs or product lines that are not meeting targets for gross margin? How do the food hub s direct-to-consumer and wholesale sales each contribute to its overall profitability? Is the food hub s income enough to cover its debt payments? How efficient is labor?

16 Comparing yourself to others (with benchmarks) Comparing yourself to yourself, i.e. Actual vs. business plan (budget analysis) Present vs. past performance (trend analysis)

17 2. ABOUT USING BENCHMARKS AND DATA THINGS TO THINK ABOUT. Which metrics make the most sense for YOUR business model? What data needs to be readily available? What needs to change about your recordkeeping to make measurement easier? Who on your team should review and respond to each metric? How often should they do it? How should this will be integrated into everyone s workflow?

18 Different kinds of metrics FINANCIAL Probably can calculate these from your financial statements Net income Sales per outlet, product line, etc. Days Receivable and Days Payable Current ratio Return on Assets Etc.

19 Different kinds of metrics OPERATIONAL Probably need some data that s not on your financial statements Avg labor costs per case Avg transportation costs per case Avg. truck utilization (% of capacity) Employee turnover rate # of fulfillment errors per delivery cycle Food Box or CSA member retention rate

20 Liquidity & Cash Flow Profitability Efficiency Solvency

21 Types of benchmarks we consulted: Food Hub Benchmarking Survey Conventional Broadline Wholesale Industry Conventional Produce Wholesale Industry Cooperative Grocers Conventional Grocers

22 3. OVERVIEW OF KEY METRICS LIQUIDITY & CASH FLOW

23 3. OVERVIEW OF KEY METRICS LIQUIDITY & CASH FLOW Name of Measure Calculation Use how often? Days Receivable Days in Inventory Days Payable Outstanding Current Ratio Working Capital ($) (Accounts Receivable / Total Sales in week or month) x days in week or month (Average inventory / COGS in week or month) x days in week or month (Accounts Payable / Total Sales in week or month) x days in month Total current assets / total current liabilities (Current Assets - current liabilities) Weekly Weekly / Monthly Monthly Quarterly Quarterly

24 3. OVERVIEW OF KEY METRICS LIQUIDITY & CASH FLOW Ways to improve liquidity & cash flow: Make a cash flow budget Aim for shorter receivables terms (e.g. Net 7 or 15) and longer payables terms (e.g. Net 30) Target some customers who can meet shorter payment terms Consider role of charitable funding Consider equity financing Reduce the time goods spend in inventory Consider implications of ownership vs. brokerage models Increase profitability

25 3. OVERVIEW OF KEY METRICS LIQUIDITY & CASH FLOW Improving collection of Accounts Receivable Speak to customers in person to confirm their credit terms Check credit and/or require references for customers Establish a credit limit with customers Monitor aged receivables closely and send statements regularly Consider offering a small percentage discount for early payers Make a rule about when you will stop delivering to late payers Require cash from late payers Personally reach out to late payers Make use of the Perishable Agricultural Commodities Act (PACA)

26 FOOD HUB EXAMPLE: LIQUIDITY & CASH FLOW What seems to be happening with this food hub? What recommendations would you make? Name%of% Measure% Days% Receivable% Days%in% Inventory% Days%Payable% Outstanding% Current%Ratio%% Calculation! (Accounts! Receivable!/! Total!Sales)!x! days!in! period! (Average! inventory!/! COGS)!x!days! in!period! (Accounts! Payable!/! Total!Sales)!x! days!in! period! Total!current! assets!/!total! current! liabilities! Benchmarks%from%other% businesses! Broadline* Wholesale** Produce* Wholesale* Food*Hub* Broadline* Wholesale** Produce* Wholesale* Conventional* Retail*Grocer** Produce* Wholesale* Food*Hub* Broadline* Wholesale** Conventional* Retail*Grocer** Cooperative* Retail*Grocer** 22.0! 30.0! <30!days!! 11.3! 6! 29.2! 47.8! <30!days! 1.7! 3.8! 3.34! Internal% Target% Actual%Performance%Q4% Oct.% 2015% Nov.% 2015% Dec.% 2015% 20% 28.2% 29.1% 19.8% 10% 18.1% 20.1% 20.3% 25% 24.5% 28.1% 25.1% 2.0% 1.5% 0.9% 1.5%! Food*Hub*! 2.39!

27 FOOD HUB EXAMPLE: LIQUIDITY & CASH FLOW What seems to be happening with this food hub? What recommendations would you make? THE BACK STORY

28 FOOD HUB EXAMPLE: LIQUIDITY & CASH FLOW What seems to be happening with this food hub? What recommendations would you make? THE BACK STORY Further suggestions????

29 FOOD HUB EXAMPLE: LIQUIDITY & CASH FLOW What seems to be happening with this food hub? What recommendations would you make? SOME IDEAS Decrease Days Receivable for wholesale program Track Days Receivable separately for the two programs Make a cash flow budget to project impacts of holding inventory Determine additional working capital needs in October/November, and apply for a line of credit More about food hub cash flow: tinyurl.com/low-capital

30 3. OVERVIEW OF KEY METRICS LIQUIDITY & CASH FLOW Cash Conversion Cycle = Days Receivable + Days in Inventory Days Payable Outstanding Alternative measure of Working Capital = Bank Balances + Inventory + Accounts Receivable Accounts Payable

31 3. OVERVIEW OF KEY METRICS PROFITABILITY

32 3. OVERVIEW OF KEY METRICS PROFITABILITY Name of Measure Calculation Use how often? Sales vs. Forecast Budget Actual Sales / Forecast Sales Weekly Gross Margin before Costs of Sales (%) Operating profit margin (%) Return on Assets (Gross Revenue - COGS) / Gross Revenue (Sales COGS operating expenses + interest + taxes)/sales Return on assets ($) / total assets, where Return on Assets ($) = net income + interest Weekly / Monthly Monthly Annually

33 Side note: how we are defining gross margins

34 3. OVERVIEW OF KEY METRICS PROFITABILITY Some Principles for Profitability Form realistic expectations for gross margins and sales Monitor margins closely, by program and by product line Look at gross margins and variable costs / Costs of Sales together for each program Consider costs of holding inventory Don t be afraid to change prices or markups; schedule price changes with customers in advance Invest judiciously in branding and marketing Use grant funding for assets that build equity and improve profitability

35 3. OVERVIEW OF KEY METRICS EFFICIENCY

36 3. OVERVIEW OF KEY METRICS EFFICIENCY Name of Measure Calculation Use how often? Revenue per Worker Equivalent (or Sales per Worker Equivalent)* Labor to Income Ratio (or Labor to Sales Ratio)* Vendor Concentration (%) Revenue / Average FTE Personnel expenses / revenues $ COGS from top 10 vendors / total sales Monthly / Quarterly Monthly / Quarterly Quarterly Customer Concentration (%) $ sales to top 10 customers / total sales Quarterly Asset Turnover Ratio Gross revenue / average assets Annually

37 3. OVERVIEW OF KEY METRICS EFFICIENCY Some Principles for Efficiency Focus on decreasing Labor to Sales Ratio and increasing Margin Minus Labor on a program-by program basis Remove sales bottlenecks Create Standard Operating Procedures together with staff Take a look at marketing strategy Involve staff in meeting goals Take a close look at work enviro, compensation and staff turnover Carefully monitor and reduce losses from product spoilage or quality concerns

38 FOOD HUB EXAMPLE: PROFITABILITY What seems to be happening with this food hub? What recommendations would you make?! Name%of% Measure% Sales%vs.% Forecast% Budget% Gross% Margin% before% Costs%of% Sales%% (%)% Operating% profit% margin%(%)% Return%on% Assets%(%)% Calculation! Actual!Sales!vs.! Projected!Sales! (Sales!3!COGS)! /!Sales!!! Return!on! Assets!/!Gross! Revenue,! where!return! on!assets!=!net! income!+! interest!+!taxes!! Return!on! assets!($)!/! total!assets,! where!return! on!assets!($)!!=! net!income!+! interest!! Benchmarks%from%other% businesses! Refer%to%food%hub's%own% business%plan! Broadline% Wholesale%% Food%Hub% (Mostly% Wholesale)% Cooperative% Retail%Grocer%% Food%Hub% (Mostly%Retail)% Food%Hub% (Overall)% Broadline% Wholesale%% Conventional% Retail%Grocer%% Cooperative% Retail%Grocer%% Broadline% Wholesale%% Conventional% Retail%Grocer%% Cooperative% Retail%Grocer%% 16.3%! 30%! 36.0%! 45%! Internal%Target%% (Q4%2015)% Actual% Performance% Q4% Wholesale:%$460,000% $411,305% Retail:%$440,000%% $382,249% Overall:%$900,000% $793,554% Wholesale:%19%%% 18.1%% Retail:%%45%! 39.1%% 28.1%! Overall:%%26%% 24.0%% 2.70%! 2.40%! 0.98%! 18.90%! 24.20%! 8.44%! Overall:%%3.0%% Overall:%%5%% (all%of%2015)% V0.5%% V3%%% %

39 FOOD HUB EXAMPLE: EFFICIENCY What seems to be happening with this food hub? What recommendations would you make?! Name%of%Measure% Sales%per% Worker% Equivalent% Labor%to%Sales% Ratio% Margin%Minus% Labor% Vendor% Concentration% Customer% Concentration% Asset%Turnover% Ratio% Calculation! Total!Sales! /!Average! FTE! Total! personnel! expenses!/! total! revenue! (Sales!B! COGS!! Labor! Expenses)!/! Sales! $!COGS! from!top!10! vendors!/! total!sales! $!sales!to! top!10! customers!/! total!sales! Gross! revenue!/! average! assets! Benchmarks%from%other% businesses! Broadline* Wholesale** Broadline* Wholesale** Cooperative* Retail*Grocer** Internal%Target%% (Q4%2015)% Actual% Performance% Q4% $387,204! $300,000% $259,000% 3.60%! Wholesale:%%12%% 12.1%% 22.86%! Retail:%%24%! 25.5%! Food*Hub* 18.30%! Overall:%%13%! 13.4%! Food*Hub* 11.7! Produce* Wholesale* Broadline* Wholesale** Broadline* Wholesale** Conventional* Retail*Grocer** Cooperative* Retail*Grocer** 29%! Wholesale:%%7%%% 7.1%% Retail:%%21%% 13.5%% Overall:%%13%% 9%% No*more*than* 30%* 25%% 35%! 30?35%* 50%% 5.4! 5.8! 4.3! Increase*from* last*year s*value* of*7.0* 6.1%

40 FOOD HUB EXAMPLE: EFFICIENCY & PROFITABILITY

41 FOOD HUB EXAMPLE: EFFICIENCY & PROFITABILITY What seems to be happening with this food hub? What recommendations would you make? THE BACK STORY

42 FOOD HUB EXAMPLE: EFFICIENCY & PROFITABILITY What seems to be happening with this food hub? What recommendations would you make? THE BACK STORY Further suggestions????

43 FOOD HUB EXAMPLE: EFFICIENCY & PROFITABILITY What seems to be happening with this food hub? What recommendations would you make? SOME IDEAS Set improvement targets for sales per worker equivalent Revisit how staffing generates sales Try to eliminate unpaid overtime by full-time staff; start by tracking these hours to determine realistic labor needs Revisit relationship with the distribution company; it is possible to raise prices? To sell them more profitable products? Work with farmers on production commitments for winter Consider raising prices or reducing quantity commitments for winter direct-to-consumer food box subscriptions

44 Side note: actual gross margins from our case studies Overall gross margin also includes other income like membership fees and shipping & delivery income

45 3. OVERVIEW OF KEY METRICS PROFITABILITY Break it down now Gross margins by program and product line Costs of Sales for each program or revenue center List of top 5 operating expenses by percentage of total -- compare to previous months or years On Accounting: tinyurl.com/foodhub-accounting

46 3. OVERVIEW OF KEY METRICS SOLVENCY Name of Measure Calculation Use how often? Debt Service Coverage Ratio EBITDA / scheduled principal and interest payments for year, where EBITDA = net income + interest + taxes + depreciation + amortization Quarterly Debt to Assets (%) Total liabilities / total assets Quarterly

47 3. OVERVIEW OF KEY METRICS SOLVENCY Strategies to Improve Solvency Reinvest profits into profitable assets Sell unneeded assets; use proceeds to pay debts Preventative maintenance to use assets longer Avoid additional debt Consider (carefully) sources of equity Grants that can pay for physical assets Co-op member equity Outside investors but be cautious! If facing default on a loan, think outside the box are temporary COGS decreases or price increases an option?

48 FOOD HUB EXAMPLE: SOLVENCY What seems to be happening with this food hub? What recommendations would you make? Name%of% Measure% Calculation! Benchmarks%from%other% businesses! Internal% Target%% 2015% Actual% Performance% 2015% Debt% Service% Coverage% Ratio% EBITDA!/!principal!and! interest!payments!due!within! period,!where!ebitda!=!net! income!+!interest!+!taxes!+! depreciation!+!amortization! Food$Hub$$!1.1A1.5!!! 1.3% 0.7% Debt%to% Assets%(%)% Total!liabilities!/!total!assets! Broadline$ Wholesale$$ 84.70%! 50%% 81%%!

49 FOOD HUB EXAMPLE: SOLVENCY What seems to be happening with this food hub? What recommendations would you make? THE BACK STORY

50 FOOD HUB EXAMPLE: SOLVENCY What seems to be happening with this food hub? What recommendations would you make? THE BACK STORY Further suggestions????

51 FOOD HUB EXAMPLE: SOLVENCY What seems to be happening with this food hub? What recommendations would you make? SOME IDEAS Continue to aim for positive net income Pay attention to depreciation know the value of your assets Consider charitable funding for purchase of assets Sell unproductive physical assets. invest in more productive ones

52 Side note: what difference does depreciation make?

53 On the income statement On the balance sheet

54 4. RECORDKEEPING TIPS On the income statement: Track revenue & COGS separately for each program Record sales and COGS by item type or product line e.g. Dairy, Meat, Produce, Frozen, etc. Try to record variable costs and labor costs by program Include processing, inbound freight, and repackaging under COGS Separate inventory adjustments (shrink) from credits given to customers for quality-related issues

55 4. RECORDKEEPING TIPS On the balance sheet: Consider tracking inventory. Reconcile inventory discrepancies regularly. Subdivide Accounts Receivable by program. Track write-offs by program. Depreciation: balance sheet version for managerial accounting?

56 WHAT ABOUT YOU? WHAT DOES YOUR FOOD HUB MEASURE? WHAT RECORDKEEPING TIPS WOULD YOU OFFER?

57 QUESTIONS? THOUGHTS? SAVANNA LYONS