By: Kary Shumway, CPA, CFO, Numbers Guy
The Fall season is upon us and that means it’s time to create your brewery budget. This document will serve as the financial road map for your business and will provide clear directions to reach your sales and profit goals for the coming year.
One challenge of the budget process is that it feels like an overwhelming task. There are so many numbers, so many unknowns and so many changes that come up unexpectedly in the brewery business. How can you accurately predict everything that will happen and get it all down on paper? The short answer is that you can’t.
As the saying goes, plans are useless, but planning is indispensable. Likewise, the budget planning process is indispensable for your brewery business.
In this article, we’ll review the key building blocks to create your budget and provide tips so that you can get started (and finished) quickly. An effective brewery budget is within your reach.
Brewery Budget Quick-Start
To get started with your budget, I recommend writing out the plan in words first. Don’t worry about the numbers right now, just write down your goals, objectives and strategy for the coming year. The numbers will come easier after that.
For example, if your goal is to grow sales by developing new beer styles or introducing new package sizes, write that into your plan. Perhaps you want to expand into a new market and hire a new sales rep for the territory. Write this into the written plan as well.
Continue this process, in writing, until you’ve got all your goals and objectives listed out. This creates clarity and momentum for the rest of the budget process. Once the big picture goals are clear and in writing, it’s much easier to quantify the objectives and build the numbers into the financial plan.
Effective Budget Basics
The operating budget involves five major building blocks: the sales forecast, margin plan, operating expense plan, capital budget and debt schedule.
Below, we’ll dig into each of the budget building blocks and give you some tips to get started. Use these ideas in connection with the budget templates and you’ll be well on your way to creating an effective budget for your brewery.
Budget Building Block #1:
The sales forecast is simply a projection of how much beer you will sell. It should show the sales by customer, by brand, by package, and by month.
If you sell through distributors, start by making a schedule of who you currently sell to (and who you plan to sell to). Include the historical sales for the past 12months, and the year over year growth for each distributor.
If you plan to open new markets with new distributors, that should be included in the schedule. If you have self-distribution sales and taproom sales, include the figures for these as well.
With a sales forecast, the trend is your friend. If growth this year was 10% but you project 50% next year, make sure you know where it will be sold.
Ask questions. Challenge assumptions. Build an achievable sales plan.
Budget Building Block #2:
Let’s begin with some simple math:
• Sales minus the cost of sales = margin
• Margin divided by sales = margin percentage
In other words, the price you charge for your beer minus the costs to make the beer is your margin.
When building your plan, use an expected margin percentage. This will make communication of the margin goal easier and allow for quick comparisons to past results.
For example, if the historical margins in your brewery are 45%, use this as an expectation for your new budget. This can be used as the goal (or a baseline) for new brands or packages you intend to create.
To dig in on your margin planning, review the cost components of your beer: Direct labor, direct materials and overhead.
Direct labor is the cost you pay people to make the beer. Salaries and benefits for brewers, cellar and packaging go in direct labor. Direct materials are the ingredients you combine to make the beer. Hops and malt go in direct materials.
Overhead is the cost of everything else that you need to produce the beer. It includes lease expense, insurance on the brewery and depreciation expense of the equipment. Overhead costs are those indirect costs, or support costs, which keep the brewery running.
Build up the costs of new beer styles or packages you intend to sell. Determine pricing, calculate expected margins, and include this information in your total brewery margin plan.
Budget Building Block #3:
OPERATING EXPENSE PLAN
Every big expense number on your budget should have a supporting schedule. Examples of big expenses include payroll, lease payments, travel budgets, and marketing costs. A supporting schedule is a detailed listing that adds up to that one number on the operating expense plan.
For example, to create the payroll schedule, list out the number of employees, expected wage rates and hours that will be worked. The sum total should match up with the payroll expense line on the budget.
To build up the expense plan and make sure everything is accounted for, I find it helpful to review spending that has occurred in the past. I do this by looking through the detailed transactions in the general ledger.
The general ledger is a listing of all the transactions that hit the financial statements. It’s like a check register that shows where money was spent and a description of what was purchased in the past.
Where did we spend money? Will that happen again? Will we spend more or less? What new plans do we have next year? What will it cost?
Chances are, if you bought something this year, you may buy it again next year. Use the general ledger to jog your memory on expense items that are likely to repeat. Use these amounts as a baseline for budgeting expenses next year.
Use the budget that you created in words and estimate spending needs based on those goals and objectives. If you don’t account for this spending in the operating expense plan, it’s tough to make the goals a reality.
Budget Building Block #4:
The capital budget is the place for big purchases like a new canning line, a keg washer or delivery van.
Anything that costs more than a set amount, say $1,000, and will last longer than a year should be on the capital budget.
The difference between a Capital Expense and an Operating Expense is that capital items need to be depreciated (or written off) over a certain period of time. If you buy a box of copy paper for $50 it’s an expense on the current income statement. If you buy a $15,000 forklift, that’s a capital expense that will be depreciated over the next five years.
Make your wish list of needed capital items. Determine what the items will cost and when you expect to buy them. This will help with cash needs planning and be an important building block of your financial budget.
Lastly, match up the expected spending to the expected funding. During this step of the budget process you’ll need to determine how you’re going to pay for a new canning line, keg washer or delivery van. List any new bank loans or new equity you will need to invest in the business to make the Capital Budget a reality.
Budget Building Block #5:
Debt Service is the amount you pay each month on your loans. These payments are made up of two parts: principal and interest. The principal portion reduces the loan amount on your balance sheet while the interest portion is an expense on the income statement.
To start, create a schedule of all your loans and the payments due on each. List the bank, type of loan, term of the debt and payment amounts. This schedule will be an integral part of the financial plan and will serve as a reminder of how much is due and when.
Wrap Up + Action Items
The brewery budget is the financial road map for your business. The plan will provide clear directions to your team so that you can reach your sales and profit goals for the new year.
Starting the budget process can be tough. So, begin by writing out your budget goals in words. Simply write out what you want to accomplish, how you intend to do it, and what resources you will need. Start with words, and let the numbers come later.
Once you have the goals and objectives written out, it’s time to add the numbers. Use the five budget building blocks: the sales forecast, margin plan, operating expense plan, capital budget and debt schedule.
An effective brewery budget is within your reach. Use the ideas here to get started and to finish your plan. Your income statement is counting on you.
For more information please contact…www.CraftBreweryFinancialTraining.com