Category: Finance

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.

 

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.

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

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/

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

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.

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