“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.
Why breweries get into a financial mess
Most entrepreneurs start breweries because of their passion for the brewing process and the product. This is an essential ingredient but to really grow it into a successful company, a good understanding of the business side of things is also required.
New breweries often get into trouble because of a poor understanding of production costs. Production costs are any cost that is directly linked to revenue generation, i.e. what costs do you have to incur in order to make a sale.
It can be further broken down into direct costs (i.e. labour, raw materials such as hops) and indirect costs (overheads such as electricity, which can be a big one for breweries, administrative expenses, marketing). Getting an accurate breakdown and understanding of these costs is the only way to manage it and stop it from spiralling out of control.
Poor management of working capital is another common mistake that can quickly lead to a drain pour in 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 a healthy cash flow and 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 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 is needed to get started before making any beer sales.
Finally, poor inventory management can quickly turn brewery finances into a mess. Having to halt 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 the ability for breweries, which work on thin margins as it is, 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 groceries 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 very beginning, which will help you to 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
Talking about streamlining your bookkeeping, the huge advancements made in cloud-based accounting technology in the last few years means 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, and will help you to easily track inventory levels, production and cost-of-goods-sold.
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.
Get a good understanding of 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 the make up your finances, i.e. assets, liabilities and owner’s equity. Great insights can be gained by performing a simple ratio analysis from balance sheet data to get an immediate assessment of 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 a break down your profitability on a brew-by-brew basis. It will allow you to compile accurate budgets and get visibility into areas that need tweaking to increase performance, e.g. storage costs might be unusually high which could lead to working on decreasing equipment idle time and increasing output, which could lead to more sales. You have therefore 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!