Re-Opening After the Pandemic

By: Donald Snyder, President/Consultant, Time & Tasks

For the first time as an author, I hope this article does not age well. With a bit of luck, you are reading this article in a post pandemic world where these concerns are a thing of the past. That said, as I write this, the world is slowly recovering from a pandemic that had a devastating impact on the hospitality industry including craft distilleries large and small. As you begin to welcome visitors and bring back staff, here are some important and helpful tips when planning your reopening.

Advice from Distillers who have Re-opened

  Throughout the pandemic, the Center for Disease Control (CDC) published fluid and ever-updating recommendations for operating a business to keep both employees and patrons safe. Suggestions like contactless payment, outdoor and reduced seating, staff and customer mask use, and social distancing were mandated to help reduce the risk of COVID-19 spread to keep businesses open, if only at a lower capacity. (https://www.cdc.gov/coronavirus)

  However, the ultimate decision of whether a tasting room could re-open to the public was in the hands of local regulators. Every state had a different set of requirements for operating a business during the pandemic. Some states, like Florida, reopened and removed capacity limits very early in the pandemic as compared to New York City where most hospitality restrictions were not rescinded until the summer of 2021. Soon after the nation-wide lock down in the spring of 2020, some distilleries were able to re-open under various restrictions.

  Cardinal Spirits Distillery in Bloomington, IN was able to open in 2020 under pretty tight restrictions. The distillery opened for carryout bottle, food, and cocktail mixes only.  Additionally, they re-configured their front entry area into a curbside drive-by for order pickup. The state of Indiana did not permit cocktails-to-go so Cardinal Spirits developed hand labeled bottles of mixer kits that people could use to make cocktails at home. Using social media and on-line platforms, they maintained and increased customer engagement with distillery tours, cocktail classes, and even virtual tastings. They hope to fully re-open in Spring 2022 although they have recently re-opened their restaurant for in-distillery dining. Jeff Wuslich, co-founder and President of Cardinal Spirits, recalls his concerns with reopening. “We are most worried for our staff. We do not believe they should have to enforce mandates and safe behavior, but we know it will likely happen. It keeps me up at night. I believe that with our air circulation, safety protocols, and distancing we will all be safe, but I hate to think about our staff having to argue with customers.” Jeff offers this additional advice for distilleries thinking about their own re-opening. “Think of the customer and what experience you would like them to have. Then, work backward from there.” 

  Smooth Ambler Distillery in Maxwelton, WV was also impacted by COVID-19. At the beginning of pandemic, the entire distillery closed public-facing operations, including their gift shop and tours for about a month. During that time, they re-allocated their labor and resources into making hand sanitizer to be donated to front line workers across the country. Once they had a better understanding of the virus, they slowly reopened their production facility with a new set of rules that included social distancing, segregated teams, masks wearing, and frequent sanitization. Smooth Ambler’s continued priority is the safety of their employees and guests.

  They were cautious about reopening the tasting room. Many of their customers were from out of state so they initially re-opened to the public with curbside pickups only. A few months later, they opened with limited capacity and slowly increased indoor occupancy as the guidance from the state permitted. Masks, temperature checks, and hand sanitization were available for all guests. So far, the re-opening has been successful for Smooth Ambler as more and more people are beginning to travel again. Travis Hammond, Operations Manager of

  Smooth Ambler, cautions distillers not to be too hasty or rigid during their public reopening. “The past year has been very difficult on everyone – the best advice I can give to other distilleries that are about to reopen is to be patient and flexible.”

  Reopening slowly and cautiously with the appropriate safety protocols in place has given many distilleries across the country a beacon of hope that things can return to a sense of normalcy. However, even with the best precautions, there still can be issues. Asymptomatic employees and customers that spread the virus can be a serious risk to all parties involved. For those in the beverage industry, contracting COVID-19 can be especially dangerous as a possible long-term loss of taste and smell could impact a distiller’s ability to make and blend high quality spirits. In addition to transmission risks from reopening, there are also risks from patrons fighting required safety protocols.

  Golden Moon Distillery in Golden, Colorado experienced that firsthand when a customer refused to wear a mask and retaliated by shoving an employee. Physical altercations with employees about safety policies or verbally abusive customers are real risks that distillers need to consider when planning for a full or limited re-opening. Stephen Gould, Proprietor and Master Distiller of Golden Moon Distillery has made employee training a pivotal part of his re-opening plan. “We’ve coached our team members to be extremely polite and courteous when asking folks to wear masks. Our main concern is the safety of our staff and customers. Having said that, the one piece of advice I can give folks that are reopening is that they need to work hard to make both their staff and their customers feel safe.”

  Another consideration for reopening is how to deal with heavy foot traffic as people continue to feel more comfortable traveling. Large tourist areas like central Tennessee have many craft distilleries that offer tours, tastings, and spirits for every palate. Pigeon Forge, TN is in the gateway to Smoky Mountain National Park that sees over 10 million visitors per year. In the spring of 2020, when everything shut down, the owners of King’s Family Distillery in Pigeon Forge were understandably nervous. Like many distilleries, by taking advantage of small business loan programs and pivoting production to hand sanitizer for local consumption, they were able to stay afloat. Cara King, Owner of King’s Family Distillery, is starting to see the light at the end of the tunnel. “When our state began lifting restrictions in 2020, the people flooded back in.

  More than before, even. We took precautions, put up plexiglass, and welcomed the tourists, masks, and all. Our distillery has reached the other side of this epic world event bigger than we were before.”

Capital Investments and Infrastructure

  Safety protocols, standard operating procedures and thorough employee training are critical to a successful re-opening. However, some additional capital investment may be required. Dalkita, an engineering and architecture firm that assists distilleries with design, safety, and construction, was instrumental in helping businesses re-open.

  Colleen Moore, Director of Marketing & Operations for Dalkita, kept up to date with all the CDC recommendations, re-opening phases, and safety recommendations. Dalkita kept the distilling industry updated with recommended and required re-opening procedures via regular webinars and blog updates (https://www.dalkita.com/news/).

  The group quickly became aware that each state and jurisdiction had varying requirements for re-opening protocols, social distancing rules, seating capacity limits, and mask requirements.

  In terms of physical and capital improvements to the distillery’s public spaces, Colleen Moore from Dalkita has been advising distilleries what they should consider. “With COVID-19 in mind and trying to reduce the likelihood of a lockdown situation due to a highly communicable airborne disease from recurring, I would suggest upgrading ventilation inside buildings. Any feature that would increase the amount of outdoor air you can bring into a building such as window walls, roll-up glass garage doors, and new increased air handling units with better filtration media and filters.

  If cold, rainy, or snowy weather put a stop to your outdoor activities, consider adding flexible open courtyards or structures with roofs and no walls for use during inclement weather. Anything that can increase the health of the people using a facility is a good investment.”

  As I write the article, I fully acknowledge that regulations are still changing. I began writing this article in March of 2021 before the mass availability of COVID-19 vaccines while most distilleries were under 30-50% occupation and seating capacity. It is now July 2021. Some states are open 100% with no restrictions but the Delta variant is growing. The article will be published the Fall of 2021 and who knows how much the world will change by then.

  For distilleries reopening or increasing capacity in 2021 or early 2022, connect with local authorities for the latest restrictions. Make every effort to keep employees and guests safe. Then again, by the time you read this, hopefully the pandemic and social distancing will be just a distant memory as we all return to normal.

Best Practices: Beer Wholesaler Agreements

By: Kary Shumway, Craft Brewery Financial Training

The wholesaler agreement can be a point of contention between breweries and wholesalers. Before any beer is delivered, the agreement must be reviewed, negotiated, and signed.

  The challenge with many agreements is that both parties want the terms to be in their favor. Breweries want options to get out of the agreement, and freedom to move their brand if the business relationship isn’t working.

  Wholesalers want the brewery to be committed to them indefinitely. From the wholesaler perspective, they invest millions or tens of millions, in infrastructure and want to be sure that brands stay on the trucks to pay for all the investment.

  Both parties want the advantage, but at a minimum, neither party wants to get taken advantage of in the agreement.

  With so much emphasis on the wholesaler agreement, what steps are you taking to ensure you get the best arrangement possible?

  Below are five steps you can take to improve your agreements, and contractual relationships.

Five Steps to a Better Agreement

1.   Seek first to understand (Basic agreement structure and terms)

2.   Know your state laws

3.   Do your research, ask questions, determine the wholesaler options

4.   Play a game you can win (Develop your own standard agreement)

5.   Self-Distribute (Enter into an agreement with yourself)

  Since we’re talking legal contracts, here is the important disclaimer: I’m not an attorney, and this is not legal advice. The guidance here should be used for informational purposes only.

Basic Agreement Structure and Terms

  As any business textbook will tell you, the primary purpose of agreement law is to enforce an agreement between parties. In this case, the parties are the wholesaler and craft brewery. For there to be an agreement, an agreement must exist, and the parties must have freely intended to be legally obligated. A breach occurs when one party breaks a big promise in the agreement.

  The requirements of a legally binding agreement are: 1) offer, 2) acceptance, 3) consideration, 4) obligations by parties, 5) competency and capacity, and 6) a written document.

  In other words, a wholesaler offers to distribute the beer of a craft brewery, and the brewery accepts. The brewery agrees to brew beer and sell it to the wholesaler. The wholesaler agrees to pay for it. The brewery is obligated to make a saleable product, and the wholesaler is obligated to sell it.

  Both brewery and wholesaler state they are competent and have the capacity to fulfill these obligations. All this is then wrapped up in a written agreement.

  The wholesaler agreement contains a variety of clauses and terms that you should understand: Trademarks, Terms of Sale, Assignment, Transfer, Ownership Changes, and Termination to name a few. A typical wholesaler agreement can be 20 pages in length and contain a dozen or more different clauses. It’s a lot to understand, but very important to do so.

  To begin, read over the agreements that you already have in place. Highlight any items that you don’t understand and start asking questions. What you don’t know can hurt you in a contract situation.

Know Your State Laws

  Thanks to the 21st amendment, we have 50 different sets of laws related to alcohol distribution. Many of those laws are difficult to understand and a giant bore to read. Get a lawyer and get a commonsense interpretation of what your state laws are. Specifically, know your rights and obligations.

  The Brewer’s Association does a nice job in summarizing the various state laws. However, the summary only scratches the surface of what you’ll need to know about the rules of engagement. Know the rules, use them to your advantage, and build them into an agreement that works best for your brewery.

  Agreements and State Laws: Agreements and state laws are often intertwined. There may be sections of the wholesaler agreement that refer to the applicable state laws. For example, ‘wholesaler or supplier may terminate this agreement in accordance with applicable state laws.’ An understanding of the state laws in combination with a working knowledge of agreement rules will give you a leg up when negotiating your wholesaler agreement.

  Lastly, there is a common assumption that the agreement really doesn’t matter that much because the state law will over-ride the agreement anyway. For instance, in a case where an agreement says one thing and the state law says another, the state law wins.

  I’m not a lawyer, but I’ve hired lawyers to deal with this issue. What I’ve found is that the question doesn’t have a clear answer. Bottom line – the agreement still matters.

Do Your Research

  When opening up new sales territories do your homework to find the best wholesaler partner. Talk to other craft breweries, talk to retail accounts (on and off premise), and of course meet with prospective wholesalers. Do your research to find your best match. There’s no point in learning about agreements and state laws if you wind up with a lousy partner.

  Many of the larger craft breweries hire consultants to conduct market research in advance of opening a new territory. The consultants talk to retailers, learn the nuances of the market, and find out who the best wholesaler is. Then they gather information and report back to the brewery with a recommendation.

  Key Questions to Ask Your Wholesaler:  You may not have the resources to hire a consultant, but you can do some leg work yourself. Below are sample questions to ask wholesalers during the research phase:

•    How do you assess opportunities for my brands at retail?

•    What is a recent example of a brand launch success?

•    What are the demographics and tourism of the market?

•    What is the pricing landscape?

•    What did you do for craft beer week?

•    Tell me about your draft line cleaning process and personnel. If line cleaning is not allowed by state law, ask what they do to ensure lines are cleaned (surveys, education) and to determine if they are cleaned (logs, vendor, and frequency of service)

  Invest the time upfront and do you research on your wholesaler options. An agreement helps define a partnership. It’s up to you to find the best wholesaler to partner with.

Play a Game You Can Win

  A wise friend once told me: “always write the agreement.” In other words, if there is an option, don’t let the other side present you with the agreement. Do it yourself.

  Writing the agreement ensures you have control over what gets included or excluded. It allows you to shape the language and create an agreement that works best for your brewery. Have your lawyer develop your own standard agreement. Talk with them about what’s important to include and what isn’t. Use your working knowledge of agreement law and state laws to shape an agreement that works.

  Use Your Leverage: When you meet with a wholesaler, simply present the document as a matter of fact: “This is our standard agreement.” They may negotiate certain points, or counter with their own standard agreement, but they might just sign what you give them.

  Many craft breweries have their own agreement these days, even the smaller guys. Craft breweries have leverage with wholesalers. If you have a brand that multiple wholesalers would like to have, they will make concessions on the terms of the agreement to ensure they get your brand.

  Recognize and understand where you have leverage and use it to your advantage. Develop your own standard agreement, include the terms you want, and insist that it is used to govern the wholesaler relationship.

Self-Distribute: Enter into an Agreement with Yourself

  Another option related to wholesaler agreements is to avoid them altogether and self-distribute your own beer. State laws will dictate whether you can do this, and what the guidelines are.

  There are many advantages of distributing your own beer: you keep the gross profit that normally goes to the wholesaler, you control where and how the brands are presented at retail, and you ensure the brands get 100% focus and attention. Despite best efforts, a wholesaler with hundreds of brands can’t possibly present your beer during every sales call. But you can.

  There are many challenges with self-distribution: increased capital costs for trucks and warehouse space, more people needed to sell and deliver the beer, and a new business model that you need to learn. Nothing wrong with learning, but it can be expensive.

  The fundamental question to ask is whether self-distribution can be profitable. To answer the question, check out the short guide on creating a financial pro forma for self-distribution. This will walk you through the steps of putting together your sales projections, expected margins, operating costs, and capital investments needed.

  Research your state distribution laws, do the financial analysis, and determine if self-distribution is the right move for your brewery.

Wrap Up

  The wholesaler agreement is important, and it’s important that you get it right. Understand the agreement terms and know the state laws. Do your research on the market and the wholesaler options. Create your own standard agreement and use your brand leverage to get the wholesaler to sign it. Lastly, explore whether a self-distribution option makes sense for your craft brewery.

  It’s up to you to find a great wholesaler partner. It’s up to you to ensure you have a good agreement that governs the relationship. Use the steps outlined here, talk to other craft breweries, and consult your attorney. A good wholesaler agreement is within your power to achieve. Now, go and get it.

For more information please visit…

inventory-count-process-scorecard/

The ABC’s of Beer Costs

By: Kary Shumway, Craft Brewery Financial Training

Brewery success depends on making great beer and making great profits. Profitability depends on knowing what the beer costs. Craft breweries are small manufacturers. In the finance world, to properly account for the costs of a brewery, we need to use manufacturing accounting. No need to be an accountant, just need to learn a few commonsense concepts. This article will give you grounding in the ABCs of your product costs so that you can make great profits to go along with the great beer.

The ABCs of Product Costing

•    Know your costs: Why it’s important.

•    The Building Blocks: Direct Material, Direct Labor, Overhead.

•    How to Implement a Simple Product Costing system.

Know Your Costs

  As businesspeople, we constantly strive to get better prices on the things we buy for our business: cans, bottles, carriers, mother cartons, etc. If there is an opportunity to save 5% or 10% without sacrificing quality or service, we jump on it. That’s just good business.

  The process of Product Costing is similar; however, we widen the lens and focus on every cost that goes into your beer.

  When you know all the costs, you begin to understand how they work together. Next, you understand how you can influence those costs, so that you can gain control of expenses and improve profitability.

  As your business grows and the numbers become larger this concept becomes more important. Set the foundation now. Know your costs.

The Building Blocks of Product Costing

  As noted above, breweries are small manufacturers, so a basic understanding of manufacturing accounting is required to know your costs. Don’t panic, I will explain this in common sense language. No accounting mumbo jumbo.

  The building blocks of your product costs: direct labor, direct material, and overhead. In a nutshell, these represent the cost of ingredients and packaging, the time to put it all together, and the overhead costs to make sure the operation runs smoothly.

DIRECT LABOR: This is the amount of time and payroll it takes to make your beer. Add up how much time it takes to make the beer and multiply by the pay rate of the folks making the beer.

DIRECT MATERIAL: This is the cost of water, malt, hops, and other ingredients that make up the beer. It includes the cost of bottles or cans, carriers, and other materials used in packaged beer.

OVERHEAD: This is the cost of everything else needed to produce your beer. Examples include the cost of utilities, water/sewer, lease expense, and a portion of the cost of your brewing equipment (based on the depreciation expense).

  All of these items taken together make up what’s called the bill of materials – the beer recipe, and the time needed to make it. Tracking all this may seem like a lot of work. Below I’ll cover two easy steps to get you started.

How to Implement a Simple Product Costing System

  Do these two things to start: calculate your standard costs and count your inventory regularly. These two things are like the 80/20 rule of understanding and staying on top of your product costs.

  If you haven’t heard of it, the 80/20 rule, otherwise known as the Pareto principle or law of the vital few, says that, for many events, roughly 80% of the effects come from 20% of the causes. I estimate that 80% of your product cost effects (improvement) will come from these two causes.

The 80/20 of Product Costs

1.   Calculate your Standard Costs

2.   Count your inventory on a regular basis

3.   Calculate Standard Cost

  Standard costs are the expected costs to make and package your beer. You can also think of this as the average cost of your beer. The actual cost will vary somewhat from batch to batch, but standard cost is intended to provide a good average. This gives you a benchmark understanding of what your beer costs.

  With standard cost, there is no need to record all the time and materials every time you brew a batch of beer, just do it once, and calculate your Standard Cost. The simplest approach is to capture the total costs associated with a brewing and packaging cycle, and then present the costs however they are most meaningful.

  For example, if a 15-barrel batch of kegged beer costs $750, this works out to a standard cost of $50 per barrel. This cost per barrel is useful when pricing your kegs for sale. Packaged beer will have a different standard cost to include the cost of cans or bottles, carriers and cartons, and other packaging.

  To calculate standard costs, begin with the building blocks: direct labor, direct material and overhead. Add them all up, and this is your standard cost. Direct labor + Direct material + Overhead = Standard cost

Count Your Inventory Regularly

  Regular and consistent counts of your inventory are among the most important things you can do to control your product costs. Counts ensure that the materials you think are there are actually there.

  Counts also ensure you don’t end up with a nasty surprise in the form of missing inventory. Missing inventory equals a write off. A write off is an expense that lowers your net income. It’s bad for your brewing schedule and worse for your income statement.

  If you take nothing else away from this article, please remember this: count your inventory regularly, match it up to the records in your inventory system, and analyze any variances. I’ve been burned so many times on this issue, it would be a personal favor if you would do this. I thank you, and your income statement thanks you.

  In previous articles, I’ve written about the basics of a good count process. Your inventory has feet and can disappear. Few things will hurt your products cost more than poor inventory count practices. Use this template to get ideas for your count process.

Wrap Up & Action Items

  Profitability depends on understanding your product costs. Understand your costs so that you can gain control over them. If you can control your costs, you can control your profit, and perhaps your destiny.

Review the ABCs of product costing and try out the ideas in your brewery:

•    Know your costs

•    Learn the Building Blocks: Direct Material, Direct Labor, Overhead

•    Implement a Simple Product Costing system

  You’ve got great beer, now it’s time to work on great profits. After all, if you aren’t profitable, you won’t be making beer much longer. The world needs your beer, and you need to be profitable. Learn the ABC’s so we can all enjoy your beer for years to come.

For more information please visit…inventory-count-process-scorecard/

Breweries: How to Price your Beer

Receive a special $50 discount off of the Craft Brewery Financial Training annual subscription. Visit http://www.craftbreweryfinance.com – Use the discount code beveragemaster at checkout to claim savings.

I recently bought a book called Priceless, The Myth of Fair Value. The book is 300+ pages long and provides great information about pricing and the role of human psychology in how purchasing decisions are made.

While the book contains a lot of interesting stories, studies, and research, it doesn’t do much to help with the fundamental question: How should you price your products?

Ideally, to price your beer, you would determine the costs, add a healthy markup, and sell it to your wholesaler (or retailer) at a fat profit. Unfortunately, the market forces and your competitors have some influence here.

So, how do you price your products?

You can look at what everyone else is charging and follow suit. You can take a wild guess and hope it will work out profitably in the end. Or you can go along with what your beer wholesaler suggests for pricing.

Regardless of how you may have priced your beer in the past, today we’re going to talk about how you can price your products profitably for the future. To make the concepts easier to understand, we’ll use hypothetical pricing numbers and examples. And we’ll walk through a template you can use to make pricing easy. Best of all, you don’t have to read a 300-page book to find the answers.

Disclaimer: Since we are talking pricing, all examples listed are hypothetical only and used for illustrative and informational purposes. Prices, costs, and margins will vary widely based on market conditions and other factors.

How to Price Your Products

  • Pricing Terms: PTC, PTR, PTW
  • How Pricing Works in the Real World: Margin needed by the brewery, wholesaler, and retailer
  • Use the Pricing Model: Plug n’ play Pricing tool for your Beer

Pricing Terms

The typical beer sales cycle looks like this: the brewery sells to the wholesaler, who then sells to the retailer, who then sells to the end consumer.

At each stage in the sales cycle, there are different prices and markups that are charged. The Price to Wholesaler, or PTW, is the amount the brewery charges to the wholesaler. The Price to Retailer, or PTR, is the price the wholesaler charges to the retailer. Lastly, the Price to Consumer, or PTC, is the amount charged to the consumer. This is the amount listed on the store shelf for your beer.

You won’t be surprised to hear that the price the consumer pays for your beer is significantly higher than what you sold it to the wholesaler for. The reason, of course, is that each stakeholder in the sales cycle needs to make money. The brewery, the wholesaler and the retailer all have margins that they need on the sale of the beer in order to run their business profitably.

Those terms again…

  • PTW = Price to wholesaler
  • PTR = Price to retailer
  • PTC = Price to consumer

How Prices Work in the Real World

To properly price your beer, it may be useful to work backwards from the Price to Consumer. This is the price of the beer on the shelf at the retail account. If your competitor’s brand is selling for a hypothetical $12.99 a six-pack, you may want to price your beer accordingly.

The challenge is to figure out how much to charge your wholesaler, who then will charge the retailer, who then will price the beer at the $12.99 price point. How does all that math work? We’ll take this in small steps.

Here’s a hypothetical example. Let’s say you charge the wholesaler $25 for a case of beer. The wholesaler needs to make, for example, a 30% margin when they sell it to the retailer. To get a 30% margin, the wholesaler then charges the retailer $36 for the beer.

The math: $36 minus $25 = $11 Margin for the wholesaler. $11 divided by $36 = 30.5% Margin percentage.

Continuing the example, let’s say the retailer also needs to make 30% on the beer. Since they will sell it in six-packs, they markup the beer and charge the customer $12.99 per six-pack.

The math: 4 six-packs times $12.99 = $51.96 total sales to consumer for the case of beer. $51.96 minus $36 cost of beer = $15.96 margin.  $15.96 margin divided by $51.96 sales price = 30.7% margin percentage.

Each stakeholder needs to make their margins at each point in the sales cycle. This is what keeps the world going round, and the beer being sold. The numbers can get confusing fast. Thank goodness we have a Pricing Model that will do the math for you.

Use the Pricing Model: Plug n’ play Pricing for your Beer

There are many variables to consider when pricing your beer. You can break out the calculator, pen, and pencil, or you can use this Pricing Model spreadsheet. Below is a snapshot:

The first step is to determine what your beer costs to make. These costs include direct labor, direct material, and overhead. Next, determine the margin that your brewery needs to cover operating costs and realize a net profit.

In the example above, the total costs of the package are $14.80. The PTW, price to wholesaler is $25, and the brewery margin is 40.8%.

The next step is to understand the required margins for the wholesaler and retailer and expected price to consumer.

In the example above, the wholesaler sells to the retailer at $36 per case. The retailer then sells the case in four units (four six-packs) at $12.99 each. This is the price to consumer. 

The pricing model takes all the variables involved in setting the price and combines them into an easy-to-use spreadsheet. Simply enter a few numbers and you’ll have the information to get your beer on the shelf at a competitive price.

Wrap Up + Action Items
Read and understand the pricing terms – Price to Wholesaler (PTD), Price to Retailer (PTR) and Price to Consumer (PTC). Know that everyone needs to make money at each step in the sales cycle. The wholesaler needs to make their margin, and so does the retailer. Most importantly, so do you, the brewery owner.

Don’t guess or follow the herd when it comes to pricing. Use the pricing model to properly price your beer and achieve profitability. Your income statement will thank you.

You can download a copy of the pricing model at www.CraftBreweryFinancialTraining.com.

 

Breweries: How to Price your Beer

Take advantage of our 50% Reader Discount off of the Craft Brewery Financial Training annual subscription. Visit http://www.craftbreweryfinance.com. Use the discount code “beveragemaster” at checkout to claim your savings.

I recently bought a book called Priceless, The Myth of Fair Value. The book is 300+ pages long and provides great information about pricing and the role of human psychology in how purchasing decisions are made.

While the book contains a lot of interesting stories, studies, and research, it doesn’t do much to help with the fundamental question: How should you price your products?

Ideally, to price your beer, you would determine the costs, add a healthy markup, and sell it to your wholesaler (or retailer) at a fat profit. Unfortunately, the market forces and your competitors have some influence here.

So, how do you price your products?

You can look at what everyone else is charging and follow suit. You can take a wild guess and hope it will work out profitably in the end. Or you can go along with what your beer wholesaler suggests for pricing.

Regardless of how you may have priced your beer in the past, today we’re going to talk about how you can price your products profitably for the future. To make the concepts easier to understand, we’ll use hypothetical pricing numbers and examples. And we’ll walk through a template you can use to make pricing easy. Best of all, you don’t have to read a 300-page book to find the answers.

Disclaimer: Since we are talking pricing, all examples listed are hypothetical only and used for illustrative and informational purposes. Prices, costs, and margins will vary widely based on market conditions and other factors.

How to Price Your Products

  • Pricing Terms: PTC, PTR, PTW
  • How Pricing Works in the Real World: Margin needed by the brewery, wholesaler, and retailer
  • Use the Pricing Model: Plug n’ play Pricing tool for your Beer

Pricing Terms

The typical beer sales cycle looks like this: the brewery sells to the wholesaler, who then sells to the retailer, who then sells to the end consumer.

At each stage in the sales cycle, there are different prices and markups that are charged. The Price to Wholesaler, or PTW, is the amount the brewery charges to the wholesaler. The Price to Retailer, or PTR, is the price the wholesaler charges to the retailer. Lastly, the Price to Consumer, or PTC, is the amount charged to the consumer. This is the amount listed on the store shelf for your beer.

You won’t be surprised to hear that the price the consumer pays for your beer is significantly higher than what you sold it to the wholesaler for. The reason, of course, is that each stakeholder in the sales cycle needs to make money. The brewery, the wholesaler and the retailer all have margins that they need on the sale of the beer in order to run their business profitably.

Those terms again…

  • PTW = Price to wholesaler
  • PTR = Price to retailer
  • PTC = Price to consumer

How Prices Work in the Real World

To properly price your beer, it may be useful to work backwards from the Price to Consumer. This is the price of the beer on the shelf at the retail account. If your competitor’s brand is selling for a hypothetical $12.99 a six-pack, you may want to price your beer accordingly.

The challenge is to figure out how much to charge your wholesaler, who then will charge the retailer, who then will price the beer at the $12.99 price point. How does all that math work? We’ll take this in small steps.

Here’s a hypothetical example. Let’s say you charge the wholesaler $25 for a case of beer. The wholesaler needs to make, for example, a 30% margin when they sell it to the retailer. To get a 30% margin, the wholesaler then charges the retailer $36 for the beer.

The math: $36 minus $25 = $11 Margin for the wholesaler. $11 divided by $36 = 30.5% Margin percentage.

Continuing the example, let’s say the retailer also needs to make 30% on the beer. Since they will sell it in six-packs, they markup the beer and charge the customer $12.99 per six-pack.

The math: 4 six-packs times $12.99 = $51.96 total sales to consumer for the case of beer. $51.96 minus $36 cost of beer = $15.96 margin.  $15.96 margin divided by $51.96 sales price = 30.7% margin percentage.

Each stakeholder needs to make their margins at each point in the sales cycle. This is what keeps the world going round, and the beer being sold. The numbers can get confusing fast. Thank goodness we have a Pricing Model that will do the math for you.

Use the Pricing Model: Plug n’ play Pricing for your Beer

There are many variables to consider when pricing your beer. You can break out the calculator, pen, and pencil, or you can use this Pricing Model spreadsheet. Below is a snapshot:

The first step is to determine what your beer costs to make. These costs include direct labor, direct material, and overhead. Next, determine the margin that your brewery needs to cover operating costs and realize a net profit.

In the example above, the total costs of the package are $14.80. The PTW, price to wholesaler is $25, and the brewery margin is 40.8%.

The next step is to understand the required margins for the wholesaler and retailer and expected price to consumer.

In the example above, the wholesaler sells to the retailer at $36 per case. The retailer then sells the case in four units (four six-packs) at $12.99 each. This is the price to consumer. 

The pricing model takes all the variables involved in setting the price and combines them into an easy-to-use spreadsheet. Simply enter a few numbers and you’ll have the information to get your beer on the shelf at a competitive price.

Wrap Up + Action Items
Read and understand the pricing terms – Price to Wholesaler (PTD), Price to Retailer (PTR) and Price to Consumer (PTC). Know that everyone needs to make money at each step in the sales cycle. The wholesaler needs to make their margin, and so does the retailer. Most importantly, so do you, the brewery owner.

Don’t guess or follow the herd when it comes to pricing. Use the pricing model to properly price your beer and achieve profitability. Your income statement will thank you.

You can download a copy of the pricing model at www.CraftBreweryFinancialTraining.com.

How to Improve SKU Management

Beer Business Finance

Financial Intel for Beer Distributors

“The more inventory a company has, the less likely they have what they need.” Taiichi Ohno

Inventory is the life blood of a wholesaler. Brands and products help define your identity as a business. However, if not properly managed, these same brands can bury you in expenses.

Purchasing inventory is the single biggest outlay of cash that your company incurs each year. In a $50 million company, more than $35 million is spent on inventory.

That is big dough. It’s also a big opportunity to enhance company financial performance by improving your portfolio management and SKU review process.

Managing inventory is a mixture of art and science. It’s a blend of subjective and objective information. There are the numbers (the objective information, the science) and then there’s your gut (the subjective information, the art) The idea is to combine the two and make the best decisions possible for your inventory portfolio and your bottom line.

The New SKU Management Course and this article will provide guidance and strategy on how to manage your inventory portfolio, monitor your key metrics and trim your un-profitable SKUs so that you can improve profit and cash flow.

The road to better SKU Management is just ahead. Let’s go.

SKU Management: Overview

  1. SKU Landscape – Then and Now
  2. Total inventory carrying costs, quantify the problem, fixed + variable, template to capture your costs
  3. The Inventory Scoreboard, Key Metrics
  4. SKU Management Fundamentals: Philosophy + Process
  5. How to identify under-performing SKUs and Fix, Sell or Close

SKU Management: Then and Now

It used to be a lot simpler. Just a few decades ago, beer wholesalers carried 100 SKUs on average. Today, the average is well over 1,000. A ten-fold increase in a short period of time.

In addition to SKU count growth, the number of craft breweries has increased five-fold in the last ten years from 1,500 to over 7,000.

The growth in both areas has created a phenomenon called SKU ‘intensity’ – the increase in package types per brand. In the past, a beer brand might be available in half-barrels and 4/6 pack bottles.

Today, beer is being packaged in 12oz cans, 16oz cans, 6packs, 12packs, 15packs, and so on. You might have five or ten different packages for the same beer. Now, that’s intense.

Non-beer SKUs are also being added to the mix: Wine, Non-Alcohol, and snacks for example. These fill up the delivery truck and can help get you more profitable stops. They also fill up the warehouse and create additional challenges to manage the inventory.

How did this happen?

You know how it happened…

Consumers demand a wide variety of choices. They want what’s new and what’s different.In order to keep up with ‘new and different’ you have to carry new breweries, new packages, and new styles.

New and different drives the growth of SKU’s in your portfolio. The simpler times of consumer brand loyalty is on a hiatus.

Distributors and retailers scrambling to meet the demands, sometimes managing by FOMO – Fear of Missing Out on the next big thing. As a result, distributors take on more brands, the SKU count goes up, and your cash flow goes down.

Distributor Evolution

In response to all this change, distributors have needed to evolve.

Specialized sales teams have been added to focus on craft. Sophisticated warehouse and inventory systems have been installed to keep track of all the new SKUs. And higher skills and new training for employees has been needed to keep pace with these new systems.

Change is nothing new for distributors, and the evolution of the business has been constant. The SKU challenge is just one more in a series of changes.

SKU Carrying Costs

So, let’s get into the nitty gritty: What is the cost to your business of these SKU increases?

In other words, how much more does it cost if you have 500 SKUs or 1,000? How about 1,500 SKUs or 5,000?

To answer the question, we’ll begin an assessment and calculation of Cost to Carry. This metric captures all costs that are included in managing, maintaining and holding your inventory.

Interestingly, studies show that 65% of companies don’t calculate carrying costs. If you don’t know your costs it is difficult to manage and improve them.

The main purpose of calculating your Cost to Carry is to identify controllable costs, and use this information as a basis for making decisions on managing breweries, brands and SKUs.

SKU Carrying Costs: Rules of Thumb

The average cost to carry inventory is 25% of inventory value. The number varies greatly from company to company, with percentages ranging from 18 to 75%.

The calculation works like this:

Add up all the expenses to manage, maintain and hold your inventory, then divide by the average on-hand inventory value.

Total Costs to Carry $500,000 divided by Inventory Value of $2,000,000 = 25%

SKU Carrying Costs: What’s Included

Below is a listing of costs that are typically included in the calculation:

  • Rent / Lease expense
  • Utilities
  • Wages: Operations Team
  • Wages: Admin Team
  • Breakage, Out of Code, Shrinkage
  • Destruction Costs
  • Insurance
  • Depreciation
  • Cost of capital (interest)
  • Transportation / Handling
  • Taxes

SKU Carrying Cost Template

To create your schedule of carrying costs, follow the steps below:

  1. List out costs associated with holding inventory. Use the list above, add/subtract based on the specifics of your beer business.
  2. Identify the basis for the cost – those factors that drive the cost. For example, hours and labor rates drive the wages, and square footage drives lease costs.
  3. Quantify the total annual cost for each item.
  4. Identify fixed costs and variable costs. Fixed costs are those that stay the same if you have 100 SKUs or 1,000.Variable costs will increase or decrease depending on the amount of inventory.
  5. Highlight those costs you can control/reduce.
  6. Calculate and input your average on-hand inventory value.

SKU Carrying Costs: Hard Costs vs Soft Costs

The items above are the Hard Costs, the actual dollars, spent on carrying inventory. There are soft costs to consider as well.

Soft Costs:

  • Opportunity costs: ‘the loss of potential gain when one alternative is chosen over another’. We have finite resources, so when dollars are invested in one brand or one SKU they aren’t available to invest in something else (other brands, other business opportunities, etc.)
  • Focus costs: The sales team can only handle so much, overload, distraction, and confusion costs money. Too many SKU’s and brands can become too much to focus on.

Soft costs are difficult to quantify, and don’t show up clearly on the income statement. But they do affect the price you pay to manage inventory.

SKU Inventory Metrics

Management of inventory can become a game of don’t run out, but don’t have too much on hand. Set proper expectations and use numbers to measure those expectations.

SKU Inventory Metrics help quantify what good inventory management looks like.

The Four Key Metrics of Inventory Management

  1. Days on Hand. Measures “Don’t have too much.”
  2. Out of Stocks. Measures “Don’t run out.”
  3. Out of Code. Watch and manage code dates.
  4. Inventory Variances. Count and safeguard your inventory.

Sign up for the New SKU Management course to get the presentation video, full Guide book, and spreadsheet templates. Your cash flow will thank you.

Yours in SKU Management,

Kary

How Your Intellectual Property Can Make or Break a Merger

By: Ashley Earle, Attorney, Dinsmore & Shohl

Like a good recipe, a good brand name for a beer, wine, or other beverage can drive sales. That recipe, distilling process, bottle design, or logo is all a form of intellectual property that helps define who you are in the industry. It can also be a defining and important part of any transaction.

  In today’s COVID world, breweries, wineries and distilleries of all types are doing what they have to in order to survive and one day thrive. Some are turning to mergers and acquisitions as potential strategies for survival and success. It’s important to know how your intellectual property (IP) can make a difference, good and bad, to a potential deal. Below are the five things you need to know about IP in a merger or acquisition. 

What Is IP?

  Before we get there, it’s important to quickly define the different types of IP that exist:

•    Trademarks: A trademark is the most common form of IP protection in the alcoholic beverage industry. It protects anything that functions as a source identifier, (product names, company names, logos like the NBC peacock, bottle or can designs like the Coca-Cola bottle, or even sounds like the ESPN tones). Trademarks can be registered and unregistered, though unregistered marks are limited in geographic scope.

•    Patents: This protects a unique invention (a brewing process, a novel distillation column), a unique design (bottle designs), or a unique plant (strains of yeast or grapes). Patents must be registered and issued to be enforceable, though pending applications will be relevant in an M&A deal.

•    Copyrights: Copyright protection arises automatically as soon as an original work of authorship is “fixed” into something tangible. Basically, once you draw the artwork for your bottle or can, write the code for your website, or draft up a piece of marketing material, it is protected by copyright. Registration affords several key benefits but is not required to claim ownership in a work.

•    Trade secrets: A trade secret is something that gives you value because it is secret. Examples include customer or vendor lists and recipes.

  Additionally, when you go through a merger or acquisition, you will often be asked to list out all of your domain names, social media, and in some cases, any software that is material to your business. It is important to make sure you keep a list of these assets in case an opportunity arises.

  Now that we’ve covered the basics, let’s dive into the top five things you need to know in a merger and acquisition when it comes to your IP.

What IP Do I (and They) Have?

  Start by taking an inventory of everything you have that is protectable – beer names, wine names, logos, artwork, packaging, unique brewing processes or recipes, social media accounts, and domain names – to name a few. This should include anything you registered, anything you are trying to register (like pending applications), and anything unregistered but material to your business. Disclosure schedules are used to list all of the IP and what is to be transferred in the transaction (if not everything). Be clear to fully disclose what you have without overstating.

  The same should be true of the other side. You should ask them to disclose all of their IP assets that will be a part of the deal, all the way down to their social media accounts and domain names.

  As you and the other side are pulling this together, you also want to collect all of your documentation to evidence the IP. This could include trademark applications and registrations, copyright registrations, patent applications, patents, email accounts, and social media accounts. You will also want to pull any licenses you have to use IP, independent contractor agreements regarding creation of IP, liens on IP (if applicable), and any documentation relating to disputes or claims of infringement involving your IP (if applicable). Make sure you have clear documentation of the chain of title (meaning who owned it at each point) from origination to present day.

Do Both Sides Actually Own Their IP?

  The next question you need to ask yourself in any deal is: Do we actually own that IP? The answer may not be as simple as you think. You need to be sure that all assets are owned by the company and not an employee, owner, or even a third party. A lot of companies don’t realize that if they hire an independent contractor to make something, whether a website, logo, or marketing materials, unless they have the contractor expressly assign the finished product to their organization, the contractor owns it. Employee-created works should automatically transfer to the employer, but it is still good practice to include an assignment in your employment agreements. 

  Ownership issues can derail or even terminate what would otherwise be a great deal. Make sure that the ownership of IP on both sides is clearly documented and validated as you move forward.

What Are We Agreeing to In the Deal Terms?

  Within the deal documentation, there will be a number of representations and warranties and indemnity provisions that relate solely to IP and the disclosures and transfers being made in the deal. This is why it’s so important to make sure you have your ducks in a row with your IP as you move forward.

  These reps and warranties will range from confirming ownership of the IP to promising your IP does not infringe the rights of others. You can also see reps and warranties that ask you to declare that your employees have not created any IP that is not owned by the company. Your legal counsel can help to finesse the reps and warranties to match your circumstances and protect you as best they can, but it’s important you ensure everything stated is accurate. A broken rep and warranty in a transaction can be expensive and arise after the deal is done.

  You may also be asked to indemnify the other side for any claims of infringement of the IP, even if you are selling your business to them and walking away. Typically, indemnity provisions should only last for a particular time period following the sale and have a few caveats of what does and does not trigger indemnity. It’s important to make sure you understand them and how they may impact you in the future.

  It’s also important that you understand what will happen to your IP or the other side’s IP after the deal is done. Who will end up as the owner? Who has control? Will any IP be left behind with either party? Are there any pitfalls with the IP that need to be addressed (like prior enforcement matters that resulted in Coexistence Agreements or liens)? Given the importance of IP to any business, it’s doubly important to understand what happens to the IP in the deal as you look to the future.

Were Things Done Right with the IP by Both Sides?

  While you want to believe all assurances a party makes in fostering the deal, both sides must do their due diligence. Did an employee copy and paste images from Google that are infringing someone’s copyright? Did you use unauthorized background music in a promotional video or advertisement? Did you see a great idea at a trade show and implement something similar, not realizing it was patented or trademarked? As the brewery, distillery, or winery grows and expands, so do the footprint and the risk for claims against you.

  Similarly, data privacy can be another pitfall. If any customer information is kept, such as names, birthdays, addresses, or credit card information, (or more abstract information such as IP address or use of cookies, beacons, and pixels), you have to be sure that this information is kept safe and confidential. Ensure there are no data breaches and never have been any breaches.

Likewise, if you are keeping any data, a clear privacy policy must be in place. Do not be tempted to copy and paste a privacy policy found online. The Federal Trade Commission (FTC) often comes down hard on businesses for having a policy that does not match what they are actually doing. Copying and pasting can lead to a policy that misleads consumers as to how you handle their data – and that’s a big problem.

A privacy policy can be fairly simple and straight forward: Explain what information you collect, where you keep it, how long you keep it, and how it is stored, and provide an option for customers to opt out (such as an email address to contact). The more information (and the clearer the information) the better – and when in doubt, ask for affirmative consent.

  With these five things in mind, you can approach a deal with confidence and find the perfect fit to expand and secure your brewery, distillery, or winery. When in doubt, consult your attorney – we’re here to help!

  Ashley Earle is an attorney at Dinsmore & Shohl who focuses on branding protection through trademark and copyright law. Dinsmore represents breweries, distilleries, wineries, cider companies and other alcoholic beverage producers in business, regulatory, intellectual property and litigation matters. Dinsmore attorney represent these entities in every stage of their business, from formation to operation to final sale or closure.  Ashley can be contacted at…513-977-8522 or ashley.earle@dinsmore.com

Brewery Financial Resolutions for the New Year

As we turn the calendar to 2021, it’s time to make financial New Year’s resolutions for your brewery. Financial resolutions may include sales growth, margin improvement, or expense reductions, to name a few.

  However, during the Covid-19 pandemic your most important resolution may be to improve cash flow. During a crisis, the most essential asset is cash, and access to capital. Simply put, when you have access to capital you can stay in business and ride out the financial turmoil.

  Therefore, in the new year, resolve to build a financing plan for your brewery so that you always have access to capital when you need it.

  In this article, we’ll review tactics and strategies to build your brewery financing plan. We’ll cover loan terms, common brewery loan structures, and the details of what a bank will need from you in order to get funding. A complete and well-thought-out financing plan lets you develop alternate sources of cash and capital when emergencies happen. Like right now.

Brewery Loan Terms and Types

  One of the keys to success in business is to have a financing plan in place before you need the money. The financing plan may include a working capital line of credit, equipment line of credit, and commercial term loans. Each loan serves a specific purpose in funding your brewery business.

Here’s a summary of each loan type:

  Working capital line of credit. This is used for short term funding needs, seasonal, or temporary cash shortfalls. It may be open ended, or there may be requirements for re-payment at certain time intervals. For example, the line may need to be paid down to zero on an annual basis. This type of loan is generally secured by assets, such as accounts receivable and inventory, and may require a personal guaranty.

  Equipment line of credit. This line of credit is for specific asset purchases like a canning line, tanks, or warehouse equipment. The line provides for a pre-approved buying ability so that you can act fast if there is an auction on used equipment, for example. The line is open ended, available when you need it, and converts to a term loan which is paid down in monthly installments. This is a useful part of a financing plan as it provides flexibility, ability to act quickly, pre-planning for brewery equipment.

   Term Loan: This loan is secured by the equipment purchased and is paid down in monthly installments of principal and interest. Unlike the equipment line of credit, this type of loan needs to be reviewed and approved prior to funding, so it takes longer to get access to the funds.

A Typical Brewery Loan Structure Might Look Like This…

  In this example, the business has a working capital line of credit of $250,000 and has used (borrowed) $50,000 of this amount. Therefore, $200,000 remains available if future cash needs arise.

The equipment line of credit in the amount of $100,000 has been pre-approved and is available should the business need to purchase brewery equipment quickly. 

  Equipment Term Loans of $100,000 have been borrowed and are related to past purchases. This loan is being paid down, or amortized, on a monthly basis with principal and interest payments.

The working capital and equipment lines of credit can provide access to capital when you need it most. However, your financing requirements may vary, so be thoughtful about what you need now, and may need in the future.

What the Bank will Need from You

  At the heart of any good financing plan is a good financial pro forma. This document will demonstrate your funding needs and ability to re-pay the loans. Moreover, the pro forma shows your lender that you understand what they require to approve the loan. This provides credibility for you and makes the lender’s job easier.

  A typical financial pro forma will present three to five years of projected results. The information is presented in summary form, and shows sales, margins, operating expenses, net income, and EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). The expected financial results are then compared to the projected payments on the requested loans. This comparison establishes the ability to make the required payments.

  Here’s an example of a summary financial pro forma:

  In this example, the financial pro forma shows a summary of annual sales, margins, operating expenses, net income and EBITDA. The EBITDA is then compared to the expected loan payment to show the ability to re-pay the loan.

Loan Covenants are Promises

You Make to the Bank

  The financial pro forma presents expected financial results and demonstrates your ability to re-pay the debt. In addition, the bank will require regular financial updates to ensure the expected results are being achieved. This is typically done by sending monthly or quarterly financial reporting.

  Further, the bank will require that loan covenants be met. Loan covenants are additional financial promises that you make to the bank. Examples include the debt service coverage ratio and the debt to net worth ratio.  

  The debt service coverage ratio measures how well cash flow covers debt payments. Here’s an example:

• Debt Service (payments on the loan) = $100,000

• Coverage (cash flow or EBITDA) = $150,000

• Debt service coverage ratio = 1.5x

  n this example, the EBITDA of $150,000 is divided by the debt service of $100,000 and yields a ratio of 1.5 times. In other words, EBITDA (cash in) is greater than debt service (cash out) by 1.5x.

  A second loan covenant that is often required is the debt to net worth ratio. As the name implies, this ratio compares the total debt of the brewery to the net worth. Here’s an example:

• Debt = $150,000

• Net Worth = $300,000

• Ratio = 0.5x

  In this example, total brewery debt is $150,000 and net worth is $300,000. For the calculation, debt is divided by net worth, and the result is a debt to net worth ratio of 0.5x.

  The covenant requirements for each ratio will be set by your lender and spelled out in your loan documents. It’s important to understand how the calculations work and measure actual results against the financial promises (covenants) that have been made.

Wrap Up & Action Items

  In the middle of the Covid-19 pandemic your most important asset is cash and access to capital. The working capital and equipment line of credit provide access to cash when you need it most. The financial pro forma demonstrates your cash needs and ability to make loan re-payments.

  A financing plan provides access to capital so that you can stay in business and ride out the financial turmoil. As you set your New Year’s resolutions, consider resolving to create a solid financing plan for your brewery.

For more information, visit: http://www.craftbreweryfinancialtraining.com/

Beer Wholesaler Checklist: How to Increase Business Value

By: Kary Shumway, Beer Business Finance

The Holiday Season is a perfect time to measure and improve business value. Value equates to strength and strength provides you with more business options.

These options may include selling your business at a higher price or being in a stronger position to buy another wholesaler business.

When you focus on creating value, there is an immediate improvement in business results: Profits, cash flows and business systems benefit from the attention to value creation.

Today’s gift is the Beer Wholesaler Value Creation Checklist. Use this one pager to bring focus to growing the value of your beer business today. https://beerbusinessfinance.com/wp-content/uploads/2020/12/BBF-Checklist-How-to-increase-business-Value.pdf

Cash flow and profit are for today, but business value is forever. Take five minutes and learn how to protect forever.

Yours in Business Value,

Kary

https://beerbusinessfinance.com/wp-content/uploads/2020/12/BBF-Checklist-How-to-increase-business-Value.pdf

Brewery Open Book Management

By: Kary Shumway

In normal times, it’s a challenge to manage brewery operations, and stay on top of the finances. There’s a lot to juggle, and never enough time to get it all done. In these abnormal times, these tasks become even more difficult.

  However, one way to manage your brewery business differently, and more effectively, is with open book management. Open book management (OBM) is a system in which employees are provided with financial information so that they can make better business decisions.

  The idea is that employees are more motivated, engaged, and productive when they are treated as business partners (who commonly have access to financial data) instead of employees. In these uncertain times, more information can provide employees with more certainty to make better decisions.

  Open Book Management has four basic elements:

•    Train employees in financial literacy so they can read and understand financial statements.

•    Empower employees to use financial information when making business decisions.

•    Trust employees as business partners with proprietary company information

•    Reward employees fairly for the brewery’s success

Train employees in Financial Literacy

  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, strengthening 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

  The financial statements are the scoreboard for your brewery and the numbers show whether you are winning or losing. The financials show you where you are in relation to your goals and how much harder you must push to hit the targets.

Open book management requires that you train employees in financial literacy so that they can know the score, and help the brewery win the financial game.

Empower Employees to Make Decisions

  In most organizations there is a decision-making hierarchy. Owners or managers make the decisions, and employees carry out the directives. With open book management, everyone is responsible for making decisions and has the authority to do so.

  If a problem needs to be fixed, employees are empowered to fix it. If an opportunity needs to be seized upon, employees are obliged to act. There is no waiting around for a manager to make these decisions. The move lies squarely on the shoulders of employees.

  With open book management, employees use their understanding of the numbers – financial literacy – to inform their decisions. For example, suppose a brewery uses a mobile canning company to package beer. The packaging manager understands the costs associated with this service and can make an informed decision about whether the purchase of canning line would benefit the company financially. The packaging manager understands how to build a return on investment calculation and is empowered to make a purchase recommendation based on the numbers.

Trust Employees with Proprietary Financial Information

  Open book management centers around trust. Do you trust your employees with sensitive financial information? What if confidential information is shared with competitors? What if it’s leaked out on social media? Sharing information requires trust.

  OBM requires that we trust employees to handle sensitive information with professionalism and confidentiality. The best way to earn the trust of employees is to be trustworthy yourself. Be transparent, share the information that will help them do their job better, or have a better understanding of the business. When you call upon the highest level of thinking from your employees, you get the highest level of results.

Reward Employees for Brewery Success

  In an open book management system, employees are asked to learn new things in addition to their core job. Brewers are asked to understand the costs that go into making the beer. Brewery salespeople are asked to understand product margins for each brand in the portfolio. Taproom staff are asked to learn the average order per customer, for example. Everyone in the organization needs to learn something new to make the open book management system work properly.

  The goal of open book management is to create a culture of business owners. OBM teaches employees to think of themselves as businesspeople instead of workers. To make this real, businesspeople need a stake in the outcome – a reward for brewery success. As such, part of what they earn should be tied to company financial performance.

  A stake in the outcome gives employees a vested interest in improving financial results. The brewer learns about the costs that go into making the beer so that she can find ways to be more efficient. The salesperson learns about product margins so that he understands the importance of proper pricing. The taproom server learns about the average order per customer to find ways to increase customer sales.

  Learning about the financial aspects of the business that are within the employee’s area of control moves the brewery towards the goal of improving overall financial results. And towards the reward of having employee businesspeople share in the success.

Wrap Up and Action Items

  Open book management is a system where financial information is shared with employees so that they can make better decisions. Better decisions lead to better financial outcomes, and better financial outcomes lead to a stronger brewery business for everyone.

  OBM requires that you train, empower, trust and reward employees. Train employees in financial literacy so they understand the finances of the business. Empower employees to make decisions and encourage them to do so. Trust employees with sensitive information and reward them when brewery financial success is achieved.

  In these uncertain times, open book management provides a way to manage your business more effectively and to reward your employees for a job well done.

  I’d like to offer your readers a $50 discount off of the Craft Brewery Financial Training annual subscription. Visit http://www.craftbreweryfinance.com Use the discount code beveragemaster at checkout to claim savings.