2014 financials

Hello everyone!

It’s been a while since we’ve really bared our souls on this blog, but it’s about time! So I’ll be making a few posts over the course of the next month to get you up to speed on our finances, our challenges, difficult decisions, and our plans for the future.

Let’s start with a quick look at how we did in 2014. Let’s dive in with the simplified profit-and-loss:

So, what does that mean in plain English?

It means that after making $31k last year, this year we only made $17k. Additionally, external to these simplified numbers, we paid our landlord about $3k in back rent (we both made an error last year in how much rent we owed), and also paid $5k to the IRS for a payment we apparently didn’t make in 2010 (you’d think they would have contacted us before 2014 about that…keep good records, kids!), plus interest on loans (about $6k) aren’t included in the above…so in reality we more or less came out even for the whole year. Not great news, since we are trying to pay off loans and make a profit for ourselves! Let’s look at a few reasons why:

Sales did not go up much. We went from $905k to $963k, a jump of 6.4%, a little less than the 2012→2013 jump which was 8.4%. But if we go back to 2011→2012, for example, the jump was 36.3%. So, long story short, sales are still growing, but our growth is leveling off.

Inventory expenses went up (as a percentage of sales). Costs of Good Sold, or COGS, are the marginal cost of each sale (this is listed as ‘inventory’ in the table above). They are, essentially, expenses that you only incur if you make a sale. For this reason, we usually express COGS as a percentage of sales, rather than in dollars. For us, the main COGS is inventory purchases (about 73% of sales — for every dollar you spend at OP, we spend 73c just to replace that inventory), but there are a few other things like credit card processing fees (about 3% of sales). In 2013 our COGS were 75.8% of sales, in 2014 they inched up to 76.9%. One percentage point. might not seem like a lot, but if you’re grossing close to a million bucks a year, each percentage point is $10,000. If we could get it down to, say, 70% — our goal — we’d have make $69,000 more in profit! In a high-volume, low-margin business like grocery, even tiny adjustments to your COGS ratio make a huge difference.

There are a few ways to improve the COGS ratio — raise prices, waste less produce, reduce shoplifting (not a huge problem for us), and find better deals from distributors. Of course, of all of these, we hate raising prices the most, but ultimately raising them by 2%-3% might have to be part of the plan.

After inventory, we had about the same amount of money to spend as last year. After buying inventory (and all COGS), this year we had $222k to spend on fixed costs. Last year we had $219k. Basically the same, but…

Fixed costs went up. Payroll went up $10k (about 7% — mostly raises, but also some extra hours). Rent went up $2k (3%). Electricity went up $2k (10%). You get the idea. Fixed costs jumped from $189k to $205k.

So, sales grew modestly, inventory ratio moved a percentage point in the wrong direction, and fixed costs all went up by a normal yearly amount. Net result is we made less money, and all of it went to the special one-time expenses and interest listed above.

Financial goals for 2015: We’re not just bean-counters (ok, we do occasionally have to literally count beans), and there’s a lot of things we want to do with the store — expand our offerings, make Open Produce a better place to shop in, to work in, etc. — but it’s good to keep the bottom line in mind. We’d like to get sales growth back into the double digits, get our COGS ratio down as close as possible to 70%, and, with the exception of continuing to give raises to our staff where we can, keep a lid on expenses.

Sounds pretty easy, right?