Intellectual Property for Beverage Manufacturers

By: Brian D. Kaider, Esq.

While many people are familiar with the four main types of intellectual property: patents, copyrights, trademarks, and trade secrets, often they don’t know the distinctions between them or what they are meant to protect.  This article is meant to cut through the confusion and explain these distinctions and how each property right applies to the beverage industry.

Patents Protect Ideas – sort of

  Most people have a general understanding that a patent protects an “invention” or an idea.  In a very general sense, that’s true.  But, even though the Congressional authority to grant patent rights comes directly from the U.S. Constitution (Article 1, Section 8, Clause 8), exactly what is patentable is the subject of tremendous confusion among the U.S. population, examiners at the U.S. Patent and Trademark Office, lawyers, and even judges; sometimes requiring clarification from the U.S. Supreme Court.  The purpose behind the grant of a patent is to encourage innovation by granting exclusive rights to one’s discoveries for a limited time.  In other words, it gives the patent holder a short-term (20 years from the date of filing) monopoly on his invention.  Generally, new machines, chemicals, electronics, methods of production, and in some cases, methods of doing business, are eligible for patent protection.

  But, not all ideas are patentable.  In fact, ideas alone cannot be patented.  They must first be “reduced to practice,” meaning that either you must have actually created your invention or have described it in sufficient detail that someone skilled in that area could follow your disclosure and create it themselves.  So, you can’t get a patent on a time machine, because (at least for now) no one has figured out how to defy the time-space continuum.  In addition, to be patentable, ideas must be novel, meaning that no one else has ever disclosed that idea before, and non-obvious, meaning that your idea cannot be an obvious variant on someone else’s invention.

  Given that humans have been making beer for thousands of years, one might think that coming up with something novel in the brewing process would be impossible.  Not so.  In preparation for this article, I ran a quick search of patents containing the word “beer” in the title and got 491 hits.  Some recent examples include U.S. Patent No. 10,570,357 – “In-line detection of chemical compounds in beer,” U.S. Patent No. 10,550,358 – Method of producing beer having a tailored flavor profile,”  and U.S. Patent No. 10,400,200 – Filter arrangement with false bottom for beer-brewing system.” 

  Improvements in any area of the alcoholic beverage industry may be patentable including, new types of bottles, cans, growlers, and kegs; new types of closures and caps; improved methods of separating hops from bines and leaves; new processing equipment, improved testing procedures and equipment, improved packaging, etc.  Essentially, anything that lowers costs between the farm and the consumer, improves the quality of the beverage, or enhances the consumer experience is worth considering for patent protection.

  One word of caution, however; time is of the essence.  The America Invents Act, effective March 16, 2013, brought the U.S. in line with most other countries in being a “first to file” system, meaning if two people develop the same invention, the first to file for patent protection wins, regardless of who first came up with the idea.  Also, any public disclosure of your idea (such as at a trade show) starts a 1-year clock to file or you may lose your eligibility for patent protection.

Copyrights Protect Creative Works

  The authority for copyright protection stems from the same section of the U.S. Constitution as patent protection, discussed above.  Our founding fathers recognized the valuable contribution made to society by authors and artists and, therefore, sought to encourage creative expression by providing protection for artistic works.  Examples of copyrightable materials include, books, paintings, sculptures, musical compositions, and photographs.

  Unlike inventive ideas, which are only protected when the government issues a patent to the inventor, copyrights attach at the moment the artistic work is “fixed” in a tangible medium.  So, for example, if a composer develops a new musical score in her head it isn’t protected, but the moment she translates that tune to notes on a page or computer screen, it becomes protected by copyright.  In order to enforce that copyright in court, however, it must be registered with the U.S. Copyright Office.  While it is possible to wait until an infringer comes along before filing for registration, doing so can severely limit the damages that may be available to the author of the creative work.  So, early registration is the better course. 

  In the beverage industry, copyright issues often crop up with regard to labels and advertising materials.  But often disputes arise relating to who owns the artwork contained within a label, for example.  Generally, the author of a work owns the copyright.  But, if an employee of a brewery, acting within the scope of their employment, creates an image that the brewery owner incorporates into its labels, that picture is considered a “work made for hire” and is owned by the brewery.  Where disputes often arise, however, is if the brewery hires an outside artist or a branding agency to develop the artwork.  In that case, the brewery should include language in its contract requiring assignment of all copyrights to the brewery for the created artistic works.  The same would apply for any artwork commissioned for use inside the brewery tasting room or for marketing materials.

Trademarks Protect “Source Identifiers”

  People generally associate trademarks with the protection of a brand.  In fact, I have often described trademarks as an “insurance policy for your brand.”  But, in more technical terms, what a trademark protects is a “source identifier.”  The purpose of trademark law is to protect consumers from being misled or mistaken as to the source of a product.  So, for example, if a consumer sees a pair of shoes with a certain famous “swoosh” image on the side, they should be reasonably able to assume that pair of shoes was manufactured by Nike, Inc. and was made with the same degree of workmanship and quality that they have come to expect from that company.  That “swoosh” symbol, therefore, acts as a source identifier to tell the public that the product was made by Nike, Inc. 

  What may function as a trademark can be quite broad, including: the name of the business (e.g., Triple Nickle Distillery®), a logo (e.g., the “swoosh”), a color (e.g., the Home Depot orange or the UPS brown), even a scent (e.g., Verizon owns a trademark on a “flowery musk scent” it pumps into its stores to help distinguish them from competitors’ environments).  Not everything can be trademarked, however.  Slogans, words, and images that appear merely as decoration as opposed to a means of identifying the supplier will not qualify for protection unless the applicant can demonstrate that the item has achieved “secondary meaning,” i.e., that the public has come to associate that item with the manufacturer.  As an example, in the 1970’s McDonalds used the slogan, “You deserve a break today” in its commercials and other advertising.  People came to associate this phrase with McDonalds and in 1973 they were granted a trademark registration.  Incidentally, McDonalds briefly let this trademark go abandoned in 2014, but quickly re-filed and the mark is still active today, more than 45 years after it first registered.

  In general, marks also cannot be descriptive of the product or geographically descriptive of the source in order to be registered as a trademark.  For example, one could not obtain a registration for just the words “India Pale Ale.,” because it simply describes the product and does nothing to differentiate it from every other IPA on the market.  Similarly, an attempt in 2019 to register the name “Philly City Brewery” was refused as “primarily geographically descriptive,” because the applicant could not demonstrate that people had come to associate that name with its business as opposed to the many other breweries in Philadelphia. 

Trade Secrets Protect Valuable Confidential Business Information

  Unlike other forms of intellectual property, there is no registration system for trade secrets, because, by their very nature, they must be protected from all unnecessary disclosure.  Trade secrets can be just about anything that is confidential to your business and gives you a competitive advantage.  Some examples, include recipes, client lists, manufacturing processes, marketing plans, and client lists.  These are things that, if publicly disclosed, would harm the competitive position of the company and, therefore, must be vigorously protected. 

  One of the most famous trade secrets is the formula for Coca-Cola.  This formula has been protected for more than 130 years, sometimes through extraordinary measures.  In 1977, The Coca Cola Company withdrew its product from India, because in order to sell there, they would have had to disclose the formula to the government.  They decided it was more prudent to forego sales to one of the biggest populations on earth rather than risk disclosure of their secret recipe.

  Protecting trade secrets requires constant vigilance in two ways.  First, the information should only be disseminated to people within the company, or outside consultants, who need the information in order to perform their duties for the company.  In other words, the information is on a strictly “need-to-know” basis.  Second, those few people who are given access, should sign non-disclosure agreements with harsh penalties for breach of their duty of confidentiality.  Once the information gets out, it’s nearly impossible to un-ring that bell, so there must be severe financial consequences to someone who leaks the information.

  Brian Kaider is a principal of KaiderLaw, a law firm with extensive experience in the craft beverage industry. He has represented clients from the smallest of start-up breweries to Fortune 500 corporations in the navigation of regulatory requirements, drafting and negotiating contracts, prosecuting trademark and patent applications, and complex commercial litigation.

For more information please contact Brian Kaider at…
240-308-8032; BKAIDER@KAIDERLAW.COM; www.KaiderLaw.com

5 Building Blocks to Build an Effective Brewery Budget

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:

SALES FORECAST

  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:

MARGIN PLAN

   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:

CAPITAL BUDGET

  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

  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

Choosing Effective Incentive Rewards for the Craft Beer Distribution Channel

America’s Beer Distributors: Fueling Jobs, Generating Economic Growth & Delivering Value to Local Communities. (PRNewsFoto/National Beer Wholesalers Association)

By: Nichole Gunn, Vice President of Marketing and Creative Services, Incentive Solutions

From improving market penetration to increasing sales volume for a specific product, craft beer producers rely on their indirect salesforce to accomplish their strategic goals. Incentive rewards can help craft beer producers create win-win scenarios for their indirect salesforce and influence their selling behaviors in ways that benefit the brand. However, not all rewards are created equal. The effectiveness of an incentive reward program depends on choosing rewards that capture the attention of wholesale and distributor sales reps and provide sufficient motivation for them to go the extra mile.

  When choosing rewards that appeal to their target audience, it’s important for craft beer producers to focus on the following factors:

•    Value Proposition: Will these rewards provide sufficient value to your indirect sales reps to justify their efforts and maintain their interest?

•    Personalization: Will these rewards feel meaningful to participants on a personal level, creating an emotional impact?

•    Scalability: Will your reward selection give you the ability to tailor your value proposition to different segments of your audience, from easily attainable rewards for new participants to exclusive rewards for top performers?

•    Memorability: How long will this reward keep your brand top-of-mind with participants? 

•    Participant Lifestyle: Which types of rewards appeal to your participants’ interests and align with their lifestyles?

•    Competition: If your competitors are running a rewards program, how will your program provide a more compelling value to your participants?

  Additionally, craft beer producers need to consider how their reward selection ties into their overarching goals, as well as their budget. Will it be more profitable to focus on providing more attainable, less personalized rewards to drive short-term growth or to develop high value, highly personalized rewards to solidify long-term loyalty? Or, perhaps, some craft beer producers will be interested in a mix of both. Either way, it’s important for craft beer producers to view their incentive reward program as an investment rather than a cost and concentrate on choosing rewards that help them achieve their goals in a profitable, cost-effective manner.

Types of Incentive Rewards

  Today’s incentive reward programs provide a variety of different reward types that craft beer producers can offer to their participants. These include gift card and debit card rewards, points-based merchandise rewards and group incentive travel. Each of these reward types has various strengths and weaknesses, depending on the goals of a craft beer producer and the makeup of their target audience.

  For instance, gift card and debit card rewards are highly scalable and provide an easy to understand value proposition. However, this comes at the expense of personalization. While a branded, reloadable debit card will keep your brand top-of-mind longer than cash commission, it doesn’t provide much in the way of social value and will not necessarily make a distributor sales rep feel warm and fuzzy about your brand. With e-delivery options and reloadable cards, gift card and debit card rewards can be awarded almost instantly, making them best-suited for SPIFFs (short-term incentive promotions) or for sales promotions for a wide audience. 

  Merchandise rewards, on the other hand, have trophy value and provide tangible rewards that indirect sales reps will associate with your brand for much longer. With an online rewards catalog that’s chock full of millions of exciting rewards, from digital movie rentals and Netflix subscriptions to home theaters, a points-based merchandise program is highly scalable and allows participants to choose personalized rewards that fit into their lifestyle and match their level of performance. Online merchandise rewards allow craft beer producers to incentivize sales growth across each segment of their salesforce, while also inspiring loyalty in top accounts with higher value, more personalized rewards.

  Of the different reward types, group incentive travel is the most memorable and emotionally impactful. By rewarding top-performing indirect sales reps with a trip to an exclusive locale like Tahiti or Venice, craft beer producers will have the opportunity to really personalize their relationship with their wholesale and distributor sales reps and create memories they won’t soon forget. However, incentive travel isn’t very scalable. Typically reserved for top accounts, incentive travel is better suited for building loyalty and solidifying long-term relationships. Additionally, it’s worth noting that while the effects of Covid-19 have put a damper on incentive travel events, demand for these trips will be through the roof when travel resumes, and many vendors will be motivated to provide great deals for craft beer producers who plan ahead. 

Setting Reward Parameters

  An important component of reward program strategy is determining how participants will be rewarded. Craft beer producers should consider which specific actions participants must take in order to accumulate reward points and whether different actions have different strategic values in helping them achieve their goals.

  For instance, if a craft beer producer’s goal is to increase overall sales, then it might make sense to assign reward points to distributor sales reps based on overall sales volume. But it also might be beneficial to provide point bonuses for first time sales, sales on a new or underperforming product line, completing online educational courses or providing referrals. All of these actions can help facilitate sales growth in the long-term and provide distributor sales reps with a clear path toward maximizing the value they receive from the program.

  Additionally, setting qualification thresholds and offering tiered rewards can help craft beer producers make their program more cost-effective. For instance, it might make sense to require distributor sales reps to sell a certain amount of beverages before they qualify for the program or to offer a group incentive travel trip for the top 25 performers each quarter, in addition to a card or points-based merchandise program for the other sales reps. Doing so allows craft beer producers to allocate their reward spend toward their most valuable supply chain trading partners, while limiting expenditure on sales reps who may not offer as much long-term value.

  In addition to tiering rewards based on performance, craft beer producers can leverage this strategy to target different hierarchical segments of their indirect salesforce, offering higher value rewards like incentive travel to sales managers while running a points-based merchandise or card program for the individual reps who work under them. This allows craft beer producers to incentivize from the top-up or the bottom-down, maximizing their influence within their sales channel.

  Online incentive technology offers craft beer producers the ability to easily segment their audience, change parameters, automatically allocate points and track the impact of these decisions on their ROI through dashboards and custom reports. For craft beer producers, it’s important to have the flexibility to quickly adjust elements of their reward program strategy, while minimizing the man hours necessary to manage their program.

Expanding on the Reward Experience

  Rewards are exciting and provide an easily understood value proposition, making them an effective tool for marketing an incentive program; but rewards are only a small component of the value an incentive program creates for craft beer producers, as well as their supply chain trading partners. An incentive reward program provides new touchpoints to improve the partner experience, such as:

•   An integrated digital hub, where indirect sales reps can connect to learn more about the brand, explore the latest incentive promotions, track their progress and redeem for rewards;

•   A communication platform that craft beer producers can use to send customized communication and automated alerts via email, SMS, push notifications and direct mail;

•   Customizable enrollment forms that craft beer producers can use to capture data about their indirect sales reps in order to personalize their sales and marketing;

•   Data collection tools that make it easy for indirect sales reps to upload sales invoices or scan QR codes in order to verify their sales claims and earn points;

•   Elements of gamification such as leaderboards, spin-to-wins and limited time bonuses to keep sales reps more consistently engaged;

•   Online surveys and analytics tools that help craft beer producers better understand the members of their channel and provide a more rewarding partner experience; and

•   Interactive quizzes and online training platforms to help indirect sales reps become more informed, effective advocates of the brand.

  The appeal of earning a reward channels indirect sales reps into this funnel and keeps them invested in the communication they receive through the program. But, more importantly, the reward program itself provides an entire ecosystem for more personalized communication and engaging brand interactions between craft beer producers and members of their channels. By focusing on the partner experience, both before and after earning a reward, craft beer producers have the opportunity to maximize the effectiveness of their reward program, solidify brand preference among their supply chain trading partners, differentiate their brand and target long-term strategic initiatives.

  Nichole Gunn is the VP of Marketing and Creative Services at Incentive Solutions (www.incentivesolutions.com), an Atlanta-based incentive company that specializes in helping B2B companies improve their channel sales, build customer loyalty, and motivate their employees. Nichole Gunn can be reached at ngunn@incentivesngunn@incentivesolutions.comolutions.com.

Brewery Financial Statements 101:

How to use Financial Reports to Improve Results

By: Kary Shumway, CPA, CFO, Numbers Guy

Financial literacy is the ability to read and understand the numbers of your brewery business so that you can improve financial results. Improving financial results may include growing sales, improving gross margins or increasing cash flow. In today’s uncertain times, financial literacy is more important than ever.

  The numbers of your brewery business are reported on the financial statements – the income statement, balance sheet and statement of cash flows. Each of these reports provides vital financial information to understand what’s going on in your business.

  In this article, we’ll review the basic components of brewery financial statements and provide examples of what these reports should look like. We’ll also dig into the mysteries of the brewery chart of accounts – the building blocks of the financials – and provide tips to make sure your financial reporting is as good as it can be.

  We’ll close out with a list of best practices to follow so that your financial information is accurately reported. These best practices are summarized into a handy checklist of month end procedures to follow.

Brewery Financial Reports

  The numbers of your business are organized into reports called the financial statements: the income statement, balance sheet and statement of cash flows. Each statement provides useful information about a different part of your brewery business.    Below is a brief review of each report.

  Income statement (Profit & Loss Statement or P&L): The brewery income statement reports on sales, margins, operating expenses and shows whether the business had a profit or loss. This statement measures results over a period of time – the month, the quarter, or year to date, for example.

  It’s important to understand that the income statement measures transactions but does not measure cash flow. The income statement records sales when earned, and expenses when incurred, regardless of whether cash was received or paid out. 

  Balance sheet: The brewery balance sheet lists assets, liabilities and equity.  Assets are things you own, liabilities are things you owe, and equity is the difference between the two.  If assets are larger than liabilities, you have equity.  If liabilities are bigger, you have a deficit.

  While the income statement measures results over a period of time, the balance sheet measures numbers as of a specific point in time – at month end, quarter end or year end, for example. 

  Statement of cash flows: This financial report measures the flow of cash coming into and going out of the brewery business.  It tells you where cash came from (collections on sales, for example) and where cash went (payments to vendors, for example).  The income statement measures transactions, not cash. The statement of cash flows shows picks up where the income statement leaves off and records the flow of money through the business.

Brewery Income Statement (P&L) Examples

  Now that we’ve covered the basic financial reports, let’s look at examples of what brewery income statements should look like.

  We’ll begin with a summarized version of the P&L.  Shorter reports are easier to read and allow you to see important information quickly.  The summary report includes sub-totals for each major P&L category: sales, margins, operating expenses and profit or loss.

  The simple P&L shows the summarized results for a period of time (Year to Date, in this example) and presents each category as a percentage of sales. P&Ls don’t need to be five or ten pages long to be good. In fact, shorter is better. Shorter is easier to read and makes it more likely that you actually will read the report. Start with a summary P&L like this one, then expand the report by adding more details. Here’s an example:

  This P&L shows sales, cost of sales, and margins by package type. This type of presentation makes it easy to see the margin percentage by package type (kegs, cans or bottles) which is useful in analyzing portfolio profitability.

  An alternative to this P&L is to present the information by line of business. This might include sales through the taproom, self-distribution and wholesale distribution. Regardless of which method you use, it’s helpful to mirror the sales categories within the cost of sales and margins categories. For example, have a separate account for taproom sales, taproom cost of sales, and taproom margins.

  Financial literacy is the ability to read and understand the numbers of your brewery business so that you can improve financial results. The income statement, balance sheet and statement of cash flows are reports that summarize those numbers. Each report gives you different information about the business, and each is important to review on a regular basis.

Brewery Chart of Accounts

  Accountants use the term Chart of Accounts to describe the listing of all the things you want to track and report on in your business. These include all of the assets, liabilities, revenue and expenses. The purpose of this listing is to provide organization and structure for your financial reporting. The Chart of Accounts serves as the building blocks of your financial statements.

  The level of detail in your chart of accounts listing will depend on how much information you want to see on your financial reports. For example, you may have three different sales accounts, as shown earlier: Sales-Kegs, Sales-Cans, and Sales-Bottles.  Each captures the sales specific to a type of package.

  Alternatively, you may have any number of different sales accounts to show sales by market and package type. For example, Sales Self-Distribution Kegs, Sales Self-Distribution Cans, Sales Self-Distribution Kegs, etc.

  Be purposeful about the level of detail in your chart of accounts. More detail may be preferable, however this will take more time for your bookkeeper to record the transactions into the proper accounts. Start with the kind of reporting you need to see in your financial statements and build the chart of accounts accordingly.

  For an example of a full brewery chart of accounts, visit www.craftbreweryfinance.com and enter chart of accounts in the search box.

Brewery Financial Month-end Process

  We’ve covered the basics of how to read the financial statements and understand the chart of accounts. Next, we’ll review a month-end process you can use to make sure your numbers are complete and accurate. A process is defined as a series of steps, followed in order, that will lead to the right outcome. In this case, the right outcome is accurate numbers in the financial reports.

  The month-end process should be clearly written and used as a document to train your bookkeeping staff. An accounting manager should periodically audit the work of staff to ensure that the process is being followed. 

  The process can be presented in the form of a checklist, indicating what task to do, when to do it, and who is responsible for completion.  Below is an example of a month-end financial checklist:

  The process checklist should contain all the necessary steps to close the books for the month in order to ensure the accuracy and completeness of the information. For example, all payroll journal entries should be made on the 1st day of the new month and all bank statements should be reconciled by the 5th business day of the month.

  To create your month-end process checklist, have your bookkeeper write down all the actions they take to close the month. Compile this list of actions and assign due dates and a responsible person. Each month when it’s time to close the books, use the checklist as a guide to make sure each step is done and completed on time.

  The best way to make sure you have good financial information is to follow a good process consistently. To download a full month-end process checklist, visit www.craftbreweryfinance.com and enter month-end process in the search box.

Wrap Up + Action Items

  Financial literacy is the ability to read and understand your financial statements so that you can improve results in your brewery business. Improved results may be sales growth, margin increases or positive cash flow. You define the result you want to achieve and use your financial literacy to make it happen.

  Use the summary income statement templates presented here or create your own so that you can monitor financial outcomes. Review your chart of accounts and compare to the template at www.craftbreweryfinance.com to identify any needed changes.

  In today’s uncertain business environment, financial literacy is a competitive advantage. Use this advantage to drive increased financial performance in your brewery business today.

    Kary Shumway is a Certified Public Accountant and has been working as a CFO in the beer business for the past 15 plus years. He creates financial training courses for beer wholesaler owners so that you can build a more profitable business.

For more information please visitwww.craftbreweryfinance.com.

Beyond the Mask: Rebuilding after COVID-19

By: Tracey L. Kelley

  At press time, details about the future economic impact of the pandemic are in constant fluctuation. However, most forecasters are certain greater challenges loom large. 

  It’s not for a lack of effort. There were many expedient pivots in the craft beverage industry, from the much-lauded manufacturing of hand sanitizer and flipping stale beer into whiskey to crafting subscription boxes and extending off-premise sales.

So, now what? We asked business consultants to provide their perspectives, and they eagerly offered frank but encouraging relaunch and repositioning action steps we hope spark ideas. Our experts include:

  Jacob Halls, partner, and Rick Laxague, partner, Craft Beverage Consultants in Columbia, Missouri. Halls advises in areas of business strategy, compliance and marketing and distribution. Laxague provides plans for distribution, operations and sales and marketing. Laxague said, “Our experts have a combined 150 years in the alcoholic beverage industry, with deep knowledge in everything from sales and distribution, production and regulatory compliance to marketing, package design, event planning, IT, (social) media, hospitality and even values-based executive coaching.”

  Scott Schiller, managing director of Thoroughbred Spirits Group, which specializes in helping new and established spirit companies. Schiller said, “Since 2009, our Chicago-based company has helped launch more than 30 distilleries, designed over 50 spirits brands and facilitated three exits.”

  Beverage Master Magazine (BM): Right now, there’s still considerable uncertainty in the beer, cider and spirits industries. Is this a time to wait and see what happens, or an opportunity to take proactive steps?   

  Jacob Halls (JH): Be proactive—successful companies see their environment and adapt to it. Waiting to see what happens to you takes you out of an element of control of the direction of your company. See the changes in the hospitality climate and take note of how they’re not going to be going back to how they were anytime soon and adapt accordingly.

Consider:

1.  Were your on-premise sales 80% of your business? Find a way to team up with your prime on-premise accounts to set up partnered order pairs if the state allows curbside/delivery alcohol sales. For example, if you have 200 kegs, sell them directly from the taproom.

2.  Slow down production in the areas where your sales drastically diminished, and shift to areas that have picked up. 

3.  Are you currently doing curbside sales at your taproom to supplement that revenue generation? Have you created a gift card program? Have you developed an online sales system and where legal, delivery/distribution program for your products and merchandise? Have you explored every option of new streams of sales? How have you maintained connection with your customer base?

Adapt—or Get Ready to Sell Your Equipment

  Rick Laxague (RL): Be proactive now! If you’re not analyzing your business right now and what the new normal looks like for your brand post-COVID, chances are you won’t recover from this.

Scott Schiller (SS): The spirits business is recession resilient, not recession-proof. I’m not an economist, but at the time of writing this, I don’t foresee the economy recovering quickly. As such, there’s no better time for the well-prepared—whether existing or those in the wings to enter the industry.

  I take no pride in writing this, but there are many distilleries, and companies in general, at risk before COVID. Unfortunately, COVID is forcing their hand. The knowledgeable, well-financed, nimble and diversified—such as those with a healthy combination of on- and off-premise ratios and affordable price points—have the potential to flourish. For the distiller in planning, there’s likely to be less competition and a healthy offering of used equipment.

  BM: In your estimation, how much of a shift do you think the pandemic and its aftermath will make in the industry?

  JH: I don’t want to sound grim, but the taprooms, bars and restaurants will take the largest hit, which passes to the alcohol producers for a decrease in on-premises sales.  Walking around or dancing shoulder-to-shoulder in a club for three hours isn’t going to be viewed as normal for a while. If an establishment’s happy hour was its primary earnings time-of-day, and it could seat 200 people with the average space between seats being two feet, how many people concerned about this will want to sit that close to someone? 

  As businesses adapt, seating space becomes less per square foot. In order to earn the same dollars-per-hour, something has to change in the pricing or the amount of staff—both of which can drastically change customer flow and demographic of the restaurant. Service may go down with fewer staff, causing a less-positive experience and fewer return visits. 

  If the prices have to go up in order to maintain the same level of staffing, then some customers may now be priced out of the establishment, as they’re financially affected by the pandemic as well. 

  The brands of alcohol purchased by the establishment may also change: a package by the smaller craft producer that’s normally $45 per case or $200 per keg may be passed over for a cheaper $23 case and $60 keg in order for the establishment to maintain its customer service level of staffing and pricing. 

  Something will have to give. Bars, restaurants, wineries, breweries, cideries, meaderies and distilleries will suffer and, in many cases, cease doing enough business to survive their existing debt loads.

  RL: It’s obvious that all segments of the industry have seen growth from new entries—that is, companies and brands opening in the past eight or more years. Some of these segments have triple-digit growth. This caused the glass for the consumer to be overflowing with overloads in brand, flavor, style and marketing. There’s no loyalty to a brand in the new 21–28 age range due to the influx of offerings. To stop the glass from overflowing, you have the following options:

1.  Get a bigger glass.

2.  More space in retail stores, as the stores aren’t getting any bigger. B: More stores, but with the cost of real estate and larger corporate retail stores the “A locations” are gone and a “C location” won’t deliver a ROI.

3.  Turn off the faucet. Stop the “overflow abundance.” The thinning of the crowd needed to happen, but it’s unfortunate that a worldwide pandemic life scare is what it took. Think of Mother Nature and our farmers who produce ingredients to make these beverages. They burn off their fields after harvest to create new healthy growth for the coming year.

  SS: The mid-size and larger distillers will benefit from this pandemic. Part of what has hindered their typical growth patterns is the number of new entrants and the plethora of local distillers who often gain favor.

  The second tier puts an incredible focus on companies that provide their quickest pathway to recovery/profitability, which will likely cause some brands to have even less attention. I believe some brands will be delisted before that dance plays out.

  Once we reach the third tier, the on-trade will rely on brands that provide value and support. Off-trade is doing very well, but I don’t foresee these profits being poured into unsupported/unknown craft brands, as consumer confidence isn’t likely to be there to warrant the investment to carry them.

  BM: In what ways is a relaunch plan essential now, and how can a producer formulate one? What might it entail?

  JH: I tend to have three or more plans for almost every situation—you can never be too ready, but you can always be underprepared.  One may ask how to prepare as a producer. In order to plan, know your business history:

•    Where have you struggled before?

•    Where were you suffering most recently?

•    How agile is your marketing team to communicate your company’s changes, and in a tone that maintains a positive message? 

•    How agile is your production team in shifting from kegs to package? 

•    How able is your operations team to facilitate the changes that need done: ordering disposable growlers, cans, contactless delivery material, etc.

•    How able are you as the proprietor to manage the economic responsibilities needed to maintain changes in your company?

•    Are you able to make hard decisions as needed?

•    Laying off or furloughing a long-time employee is incredibly hard to do. Do you have a support system yourself for this?

  Account for everything that has happened and can happen. 

  RL: What is the saying: “You have one chance to make a good impression?” Well, now you have a second chance! Look at your original business plan and model and select all the positives—then write a new one. You can remove things you did wrong and implement those you thought of after the fact. You know more now, but not everything. So source out what you don’t know, a.k.a, “phone an expert.”

  SS: No matter how this pandemic is influencing your business, it’s vital to create a strategic plan with several pathways and outcomes, for there is only one who is all-knowing in this unknown, and that is neither you nor me.

  With plans in place, financial models need to be built to ascertain how much time you have, and along with an awareness of critical decisions and time periods. Assigning weights to the various outcomes also allows you to make a calculated risk assessment on what should even be attempted.

  BM: What top three action items do you recommend to producers right now?

JH:

1.  Don’t produce just to produce unless you need to burn through raw materials already purchased. If you can, barrel-age or delay the release dates to maintain the production/release rate to sales rates.

2.  Take a cold look at your finances. The hardest part of that is being honest with yourself. Don’t let ego make the decisions.

3.  Be as proactive in your community as possible. If you can, develop a T-shirt that’s available online or curbside with 100% of the proceeds going to support your furloughed taproom staff or a local community cause. Work with your distributors in other communities outside your own to be supportive there as well. Be part of the community, even if you’re not local—keep your face seen in a positive way.

RL:

1.   Evaluate finances. What can you afford to do, and what can you afford not to do, have or upgrade?

2.   Branding. What can you improve upon from a brand perspective—as in, how to reach the consumer and engage with them? Get them to stop scrolling, and “like” (buy) your brand. I think virtual happy hours will be a popular thing moving forward for friends and families apart.

3.   Distribution. Improve your relationship with the distributor network. This also means having adequate sales-brand representation to work with your distribution network to secure those placements.

SS:

1.  Center yourself and get extra clear on your definition of success.

2.  Develop a rock-solid strategic plan and financial model.

3.  Get your team informed and aligned, from front-line workers to investors. Prepare them mentally and emotionally for what’s at hand. Ensure that you have the right warriors, and that you have the leadership and wisdom to see them through.

  BM: In what ways can producers work within their communities and develop new marketing strategies to rebuild their businesses?

  JH:  As mentioned above, team up with distributors, businesses that supported your brand well, and charities and causes that are positively helping communities during this pandemic. 

  RL: Thank the community for the support during this crisis. If you have a loyalty program, use an email marketing platform to send a direct thank you letter to the zip codes where members reside. Make it a bounce back: “Thanks for the support, bring this letter in for a ½ off item,” or a similar promotion.

  SS: Every business is in this together, and every business is going to need help. Distilleries and other craft producers have always been important members of communities, from supporting other local businesses such as farms and utility companies; to offering dependable and well-paid jobs from production to sales to executives; and of course, providing extensive tax revenue for their municipalities and states.

  Distillers switched gears during world wars, and are doing so now during the pandemic. This is an amazing time to be a leading light in the community and an essential economic engine in a town’s rebirth. We often say “support local.” This is a two-way street and right now, distillers can lead.

  BM: Finally, “no revenue” is an obvious answer to the question, “Should I close?” But in the current over-expanded market, what other answers might a producer consider?

  JH: SKU reduction. If you have a brand that’s working and some that are lagging, but they’re being produced to fill out the portfolio to make your brand more attractive to distributors, grocery, C-store sets or franchise restaurant chain mandates—cut them! Focus on what’s working and do it well.

  RL: Be humble. It’s more admirable to ask for help than to never build a new door to walk through. Also consider:

1.   What’s your quality of life? Health, stress levels, missing kids’ activities because you must run the business and so on. This pandemic has brought families together. More meals in groups, board game conversation and outdoor life vs. a face in a phone all the time.

2.   Are you staying true to the mantra, integrity and goal of why you opened the business? Some people will say no—they’re just trying to keep up.

  SS: This pandemic will hopefully be the toughest business challenge you’ll ever face in your lifetime. As such, it presents an excellent opportunity to confirm your commitment to your business:

1.   Is it your life’s calling/purpose?

2.   Do you have the energy and resources to start back from where you were in the early years?

3.   What will your personal and financial well-being look like if it takes two years to get to where you were at the end of 2019?

  If you have the fortitude and the wisdom, you can work through this. And the field will likely be even greener if you can make it through the next 730 days.

BEER FINANCE: Covid-19 Cash Tactics & Strategies

 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

•    Payroll

•    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.