By: Kary Shumway, Founder of Craft Brewery Finance
The Covid-19 pandemic is wreaking havoc with our emotional and financial well-being. Now, more than ever, cash flow planning is a survival skill. In this article, we’ll review tactics and strategies to keep more cash in your business during this crisis. And I’ll share the cash flow templates that I use to monitor cash flow in our brewery.
We’ll also cover how to build a new financial plan for the coming weeks and months to make sure you are properly tracking revenue, expenses and cash flow. This crisis will end, but the brewery financial skills you learn today will benefit you and your business forever. Use them to survive now and thrive into the future.
Short-Term Planning: Survival Mode
First things first, let’s focus on cash. Financial survival requires cash on hand, access to capital, and a tool to project near-term cash flows. Start with how much cash you have on hand, and list potential sources of additional capital.
Next, calculate expected cash flows for the upcoming week. List out expected collections from accounts receivable, and payments to employees, vendors and the bank. Use a simple tool like this to summarize the numbers.
This cash flow tool will show you cash on hand, and upcoming flows of money in and out of the business. It’s a tracker you can update quickly and regularly to keep a close eye on short-term cash flow.
Next, dig in a little deeper on accounts receivable (A/R). These are your uncollected payments from customers and must be monitored closely during this crisis. Use the detailed A/R aging report to monitor any overdue customer invoices. Accounts receivable represents future incoming cash flow and is critical to the financial survival of your brewery. Communicate with any overdue customers, work out new terms if you must, and keep the cash flowing in.
Likewise, review the details of your accounts payable (A/P). These are your unpaid invoices to vendors and suppliers. Identify those invoices that must be paid on time, and which can be pushed off. Communicate with key vendors and ask whether they will accept extended terms. For example, if a vendor offers 30-day credit terms, they may be willing to extend to 60 or 90 days. The goal is to slow down the outflow of cash, while maintaining a good relationship with key vendors. Monitor your accounts payable, communicate with vendors, and keep more cash on hand.
Change Your Cash Process
One important skill to learn during this financial crisis is how to aggressively manage cash flow. Specifically, learn where cash leaves the brewery and how you can adjust quickly to keep more cash in your bank account. Cash on hand means you’re in business. Running out of cash means big trouble. To aggressively manage cash flow, I use a three-step process that looks like this:
1. Find out how and where money leaves your business.
2. Insert yourself into the money-out process.
3. Review past spending … and adjust.
Step 1: Find out how and where money leaves your business
To start, make a list of the ways that money flows out of your brewery. The usual cash outflows are:
• Accounts payable
• Manual checks
• Electronic Funds Transfer (EFT)
• Automated Clearing House (ACH)
Pay special attention to the last two bullet points. These are deductions directly from your bank account and may go unnoticed in a time when you’re trying to turn off cash outflows.
Which of these cash outflows apply to your business? Take your list and move on to the next step.
Step 2: Insert yourself into the money-out process
Put yourself directly in-between your money and the expense to be paid. In other words, sign every check that goes out through accounts payable, review every manual check before it is mailed, look over the payroll report before it is processed, and get a listing of all the EFT or ACH payments that have been processed through your bank account.
This is the only way to slow or stop cash from flowing out of your business. You need to be directly involved, and directly in-between your money and the expense to be paid.
Step 3: Review past spending
One of my favorite financial reports, in good times and bad, is the general ledger (G/L). It records every transaction that flows through your business. The G/L can serve as a road map to reduce the outflows of cash in an emergency.
Print a copy of your detailed general ledger for the past 12 months and review all the expenses. As you look over the figures, ask questions: What cash outflows are recurring? What can be shut off immediately? What upcoming payments can be delayed or deferred?
The general ledger isn’t just for the bookkeeper, it’s a tool for brewery owners and managers to identify and shut off cash outflows.
Use these cash flow tactics
In addition to the 3-step process, there are several specific steps you can take right now to improve cash flows during this crisis. These include communication with your beer wholesaler, bank, insurance company, key vendors, and landlord. The primary goal of this communication: Build a plan so that you don’t run out of cash.
Market changes are happening daily, and this requires regular communication with your wholesaler partners. Ask what they are seeing for sales trends. This will help inform expected sales volume as well as production and packaging plans. Ask your wholesaler what they need, and how you can help. Your wholesaler is your biggest customer, and biggest source of cash flow. Stay close, be supportive and responsive to their needs to keep the cash coming in.
If you have business debt, you have monthly payments of principal and interest due to the bank. In this crisis, your lender may have the ability to reduce your monthly payments to interest-only. This can be a significant cash flow savings.
Take for example, a brewery with monthly debt payments of $10,000 per month. The loan payment schedule shows the $10,000 payment represents $8,000 of principal and $2,000 of interest. Therefore, reducing the payments to interest-only will save $8,000 per month in cash flow.
If you have business interruption insurance, reach out to your insurance company to determine coverage. While this type of insurance usually excludes pandemics (go figure) it is still worthwhile to understand how the claim process works. Legislative rules are changing every day, and it’s possible that insurance companies will be required to cover losses. Learn about your coverage, file a claim, and you’ll be ready if the rules change.
Your key vendors may be open to extending payment terms to 60 days, 90 days or longer. Some larger vendors may reach out to you and negotiate new terms. Other vendors you have to ask. The takeaway is to be pro-active, communicate with your vendor partners and negotiate new terms that you both can live with. Any credit extension you can get will improve short term cash flow.
This same approach can be used with your landlord. If you have a lease, you have monthly rent that needs to be paid on time. Your landlord may be open to a rent deferral in exchange for extending the back end of the lease. For example, no rent for the next two months, in exchange for the lease end date to be extended two months. As with the other ideas in this section, this might not work. But if it does, it will help short term cash flow.
Re-forecast Your Financials
The cash flow tool shared earlier is useful for a quick look at short-term cash flows. The financial re-forecast tool that we will cover next provides a longer-term look at expected results.
Thanks to the financial crisis, your original forecast for this year is no longer relevant. However, it can still be used as a starting point for the financial re-forecast. Adjust the numbers up or down depending on changes to the business, new information that arrives daily, and trends in the market.
To start this process, take the annual plan and spread it out over the 12-months of the year. The financial re-forecast model that I use looks like this:
On the left side of the model, summarize sales, margins and operating expenses. Across the top of sheet, list out each month in the year and whether the information is based on actual or forecasted numbers. For example, if you have January, February and March financials completed, input those actual results in the sheet. For the remainder of the months in the year, mark these as forecasted numbers.
The financial re-forecast tool is intended to be a one-page plan that is quick and easy to update on a regular basis with new information as it becomes available. Use this tool to combine all the information you are gathering from wholesaler partners, key vendors, and changes to legislation (such as the excise tax deferral).
Wrap Up + Action Items
Cash flow planning is a financial survival skill and is needed now more than ever. While we don’t know when this crisis will end or what business will look like when it does, we do know how to aggressively manage cash to keep our business going as long as possible.
Use the cash flow template presented here to keep a close eye on cash balances, access to capital and expected money flows into and out of your brewery. Take an active role in managing this most important asset.
Use the financial re-forecast model to build a simple, one-page plan. Keep the numbers high-level to start – sales, margins, and operating expenses. Update the plan on a regular basis as changes happen. And changes are happening every day.
The brewery financial skills you learn today will benefit your business forever. Build your skills to survive now and thrive into the future.
Kary Shumway is the founder of Craft Brewery Finance, an online resource for beer industry professionals. He has worked in the beer industry for more than 20 years as a certified public accountant and a chief financial officer for a beer distributor. He currently serves as CFO for Wormtown Brewery in Worcester, Massachusetts.
Craft Brewery Finance publishes a weekly beer industry finance newsletter, offers online training courses on topics such as cash flow planning, financial forecasting, and brewery metrics. During this crisis, Craft Brewery Finance is offering a Free 60-Day Subscription. Visit www.CraftBreweryFinance.com for details.