“For a quart of Ale is a dish for a king!” - William Shakespeare from ‘A Winter’s Tale’
Breweries are often directly responsible for the barrel of laughs we share with good friends over a nice cold beer. But breweries are much more than just brewing beer and finding that unique blend of hops, malts, yeast, and water. They can be several businesses in one, from manufacturing and distributing to taprooms (restaurants) and even merchandise.
Running a brewery is a fine balance, especially for startup brewers, and an even bigger challenge to keep your brewery clear of any financial mess.
Related: Comprehensive Bookkeeping Guide for Breweries
Why do breweries get into a financial mess?
Most entrepreneurs start breweries because they are passionate about the brewing process and the product. Passion is an essential ingredient, but to grow a brewery into a successful company, a good understanding of the business side is also required.
Production Costs
New breweries often get into trouble because of a poor understanding of production costs. Production costs are any cost directly linked to revenue generation, i.e., what costs do you have to incur to make a sale?
They can be further broken down into direct costs (such as labour and raw materials such as hops) and indirect costs (overhead such as electricity, which can be a big one for breweries, administrative expenses, and marketing). Getting an accurate breakdown and understanding of these costs is the only way to manage them and stop them from spiralling out of control.
Working Capital
Poor management of working capital is another common mistake that can quickly drain brewery finances. Working capital is often described as the difference between a company’s current assets and current liabilities. What does that actually mean?
Good working capital management is closely related to healthy cash flow. It looks at a company’s ability to pay short-term debts—salaries, lease payments on equipment and premises, suppliers of raw ingredients (hops, malts)—with short-term liquid assets, such as cash in the bank and accounts receivables.
It is essential to have enough working capital for the brewery to run on a day-to-day basis, and new brewers will often underestimate how much working capital they need to get started before making any beer sales.
Inventory Management
Finally, poor inventory management can quickly turn brewery finances into a mess. Halting production because the malted barley stocks have been depleted or dealing with excess storage costs because too many hops have been ordered can severely impact breweries' ability to turn a profit at the end of the month.
New brewers might use a simple spreadsheet to control the level of raw materials in stock by manually entering opening inventory, how much was delivered and how much was used. This is updated after every brew but can quickly become a tedious and time-consuming task, one which is prone to human error. As the brewery grows, a more automated and sophisticated system will be needed for effective inventory management.
Why it’s important to start your bookkeeping process early
Let’s face it - if you are looking to start a brewery, you have a passion for creating that next big, high-quality, barrel-aged beer that’s set to take the craft market by storm and not so much for entering transactions into an accounting system.
However, breweries have high start-up costs.
Apart from licensing, permits and insurance expenses, it’s not uncommon for smaller operations to pay upwards of $100,000 in obtaining a lease on a large enough premise to house the equipment, plus additional space for storage, plumbing, electrical components, and brewing equipment. The minimum equipment to get up and running can also look like a rather lengthy grocery list, including boilers, kegs, kettles, storage tanks, fermentation tanks, waste treatment systems, cleaning equipment, cooling systems and refrigeration equipment. Considering that you might want to buy a property with extra room to grow, install your own bottling system and maybe add a taproom, the startup cost can easily increase to $1 million.
It is very important to keep track of these costs from the beginning. This will help you budget more accurately and start making money before your working capital runs dry.
This is a lot to keep in mind on top of all the normal stress of starting a small business. Bookkeeping is one area you might want to consider outsourcing from the beginning.
It frees up time so you can concentrate on brewing and the quality of your product. It also ensures that your books are set up correctly from the start so that the process can easily be scaled as your business grows. Your accountant can then provide insights into streamlining your bookkeeping by implementing the right tech stack for your brewery to keep monthly administration costs to a minimum.
Implement cloud-based accounting software that integrates all your brewery software
When it comes to streamlining your bookkeeping, the huge advancements made in cloud-based accounting technology in the last few years mean that staying on top of your brewery bookkeeping doesn’t have to be a hassle.
Software like Ekos Brewmaster synchronizes effortlessly with QuickBooks Online, a popular small-business, cloud-based accounting software. It will help you easily track inventory levels, production, and cost of goods sold (COGS).
Other cloud-based technologies that will help your brewery run smoother include Xero, with add-ons such as Dext Prepare that allows you to easily record receipts by simply scanning them through an app on your phone, Expensify to keep track of and manage company expenses, and Plooto to integrate and automate recurring payments within Xero or QuickBooks Online.
Over time, your brewery will grow, and one of your primary focuses will become cost accounting and inventory control. These cloud-based programs are just some of the innovative accounting tools that will help you manage these operations with more efficiency and accuracy.
Understanding your financial reports
If you understand how to read them, financial reports will become a small business owner’s best friend. All the various pieces of information across your business are consolidated to give you a great overview of exactly what’s going on.
A balance sheet gives you a snapshot of the three major categories that make up your finances: assets, liabilities, and owner’s equity. A simple ratio analysis from balance sheet data can give you great insights into your company’s health.
Your income statement will tell you exactly how much you made in sales, how much you paid in expenses and how much profit you made over a certain period (usually yearly, quarterly or even monthly). It will also give you a better understanding of how fixed/variable and direct/indirect costs are affecting your revenue and profitability.
These are essential elements if you want to break down your brew-by-brew profitability. It will allow you to compile accurate budgets and get visibility into areas that need tweaking to increase performance, like high storage costs, which could lead to working on decreasing equipment idle time and increasing output, which could lead to more sales. You have not only decreased storage costs but increased output and sales just by looking at one line item in your financials.
A healthy income statement could also help your brewery to secure financing, as future income and profitability projections are much more reliable if based on a solid past performance.
At Enkel, we have a reliable team of bookkeepers with an in-depth understanding of brewery bookkeeping. We’ll take on your books with just as much enthusiasm as you have for turning ordinary hops, malts, yeast, and water into a delicious glass of beer. Get in touch with us today to find out how we can help!
