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Financial Tips & Insights from the Front-lines of Industry

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4 Key Performance Indicators Hemp Executives Use to Increase Profits

Updated: Jun 10


The lack of predictability in the nascent hemp industry means companies need to aware and agile, ready to adapt as soon as possible when necessary. Hidden within your business are golden nuggets of data that will help you understand the hidden factors impacting your growth and make more effective decisions.

YOUR BANK BALANCE IS A LIAR

If you’ve ever looked at the profit your business is generating, you may have noticed that the profit appears much higher than your bank balance.

Why is that?

Your bank balance is unreliable. Period. You cannot rely on your bank balance to tell you how much you can spend in your business.

You absolutely need to utilize financial statements to understand the financial health of your business. The sooner you begin, the better your short- and long-term results will be.

REVENUE GROWTH RATE

It might be obvious, but the Revenue Growth Rate refers to the rate at which a company’s income, or sales growth, is increasing (or decreasing). The Revenue Growth Rate is measured across periods, often by month and year. A quarterly Revenue Growth Rate can be very valuable in understanding seasonal fluctuations affecting the business.

Revenue Growth Rate

=

((Current Period Revenue – Previous Period Revenue) / Previous Period Revenue) x 100

Insights gained by calculating your revenue growth rate include potential seasonality, impacts of marketing behaviors, understanding of advertising ROI, and interaction with industry or consumer trends.

OPERATING MARGIN

Operating margin is your measure of profitability. It tells you how much of each dollar earned is profit that can be re-invested, used to pay liabilities, or taken home to your family. Operating margin as a percentage of revenue is often used to track a company’s performance over time, and compare it with other businesses in the same model or industry.

Operating Margin Percentage

=

(Net Revenue – COGS – Expenses) / Net Revenue

The resulting percentage is incredibly useful in showing whether a business is actually increasing profits over time, and to what extent. Many executives make the mistake of relying on revenue alone to visualize the success of their business. Revenue is important and sales absolutely must be a cornerstone in your foundation, but increasing revenue means nothing if your Operating Margin Percentage is low.

GROSS PROFIT MARGIN AS A PERCENTAGE OF REVENUE

No business can achieve success if it’s paying out more to suppliers than it’s netting in sales each month from customers. Gross profit margin as a percentage of sales is an expression of total profits as it compares to revenue and cost of goods

Gross Margin as a Percentage of Revenue

=

(Gross Margin / Revenue ) X 100

This calculation allows you to easily quantify how much money you’re keeping against the amount paid out to suppliers for your Cost of Goods. As businesses retain more money, gross profit margin increases. But a decrease in gross margin as a percentage of sales could indicate that a business is overspending on its supplies. Owners would need to reduce overhead costs or increase prices on goods and services to compensate.

CASH FLOW STATEMENT

The cash flow statement is critical to understanding your ability to pay for current liabilities using your current assets, aka. your business’ liquidity. It reflects the actual amount of money the company receives from its operations. The 3 main activities found in a cash flow statement are: operating activities, investing activities, & financing activities.

Your cash flow statement should be accessible within your accounting. We work with our clients to develop an effective plan for managing cash flow.

PUT IT TO WORK

You should look to your CFO or Accountant to implement these calculations and analyze the insights you’ll gain. We work directly with our clients to pinpoint key data points that help them to understand their operations strengths and weaknesses, and find opportunities to increase profits. Schedule a call with us to find out how we can help you do the same!


Need help with this?

We support business owners from pre-revenue through 8-figures in gross annual revenue. You choose whether we collaborate via year-round partnerships or project-based consulting. 

About the Authors

Sonder Accounting was founded in 2016 by Kara Janowsky to serve the financial maagement needs of the nascent cannabis industry. Our small and specialized team has partnered with over 250 businesses in similar industries to build functional financials that drive business growth:

Learn more about how we work with companies like yours:

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