With budget season approaching, I want to share the importance of preparing a budget for your brewery. Let’s begin by answering some basic questions about budgeting:
- What is a budget? Budgets represent a detailed analysis of how a brewery plans to receive and spend money in future periods.
- When should I prepare my budget? As mentioned earlier, I work on budgets from now through November depending on the size of the brewery. The bigger the brewery, the more data we need to analyze and the more conversation we need to have.
- Why is a budget important? While there are many reasons a budget is important for your brewery, this post will highlight the top four. I think the budget process is so important that we work closely with each of our brewery customers to prepare their annual budget.
Before I dive into the top four reasons to build a budget, let’s talk more about the foundation of creating a budget. Be sure to distinguish between budgets and forecast/projections. I will briefly speak about forecast/projections at the end of the post. For a budget to be useful, you must have historical numbers. These numbers are the starting point from which we can build assumptions. The numbers should come from a formal accounting system and have validity to them. I like 26 to 32 months of data to analyze, but use a rolling 12 month historical to build the budget. From there we look at future sales forecasts, distributors forecasts, labor requirements, seasonal trends and many more factors to build out what the next 12 months may look like. The following are my top four reasons why breweries should build an annual budget.
1. Cash Flow
- A budget will show you what the future cash flow should be so you can plan accordingly. It will allow you to predict possible cash shortfalls, so as to have a line of credit ready. Likewise, you should also be able to predict cash surpluses to fill the coffers. To all my customers over 2,000 bbls in annual production, we budget a maintenance fund for unexpected breakdowns, which we all know happen.
- Capital expenditure strain on cash flow is another reason to have a budget. Most breweries are growing very fast; growth means more metal. Budget any large equipment purchases into your budget and see how it affects the cash. What is the payback period on a new tank? How quickly can we start selling that beer?
- Debt payoff is another cash flow benefit of budgeting. If growth is not in the plans, what is the best means to pay back our debt? Is the cash cheap enough for us to continue paying it down slowly? Or should we pay it back sooner?
2. Expenditure planning
This is my favorite of the four because it is a powerful tool. How are expenditures approved in most breweries? Usually, the owner gives it a thumbs up or thumbs down based on cash flow that week. Sorry, but it can’t be that simple. A proper budget should assign amounts to each line item. These amounts are not pulled out of thin air; they are historical numbers that are discussed for possible changes. Here is the powerful part: What most breweries are missing with arbitrary spending is opportunity cost.
Example: Sales director budgets $700 per salesperson (three), per month for reimbursements (meals, travel, comps, etc.). Halfway through the year, accounting generates a report noting that each salesperson is really spending $1,100 per month in reimbursements. No corrective action occurs. By year end, at bonus time, the sales director is told he went $14,400 over budget in reimbursements while barely achieving his annual sales goals.
So, here are two interesting points to make: 1) this was not a major hit to the company cash flow or someone would have brought it up earlier in the year; and 2) what other use could $14,400 have gone toward? No. 2 is the opportunity cost I was mentioning earlier. I could go on and on about this function also acting as financial controls from fraud but, my takeaway here is, set budget line items and stick to them as close as you can.
You’re halfway to becoming a budget-building pro. Click “Next page” to continue reading.
3. Profit planning
Your decision to open a brewery came with some sizable risk. The result of this risk is, hopefully, profit. Budgeting should be the cornerstone for determining how to grow profits. When you look at all your revenue sources, which one has the highest profit margin? Wholesale? Retail? Events? Don’t assume it is retail sales because your buddy down the street says it is. Yes, retail is very profitable; however, the way you manage the expenses associated with that revenue stream is critical, which is why you need to know your profit margins. This knowledge should help validate business decisions such as hours of operation and sales goals. Master this one, and you will have the financial freedom to spend or save.
4. Conversation
Budget time usually brings up interesting conversations at the brewery. By interesting, I mean hard conversations. In business, with all our spreadsheets and equipment, we sometimes forget to dial it back and have a conversation about the things that do not feel right. This is why I love the budget process. We seem to always uncover an issue. Issues in business are good because without issues we would all get bored. The issue may not be affecting the numbers now, but left alone long enough and it will.
My experience with budgeting has showed me the power in having conversations about the numbers. Knowing this, my sessions tend to resemble the following: Owners and myself, locked in a room for up to four hours with no gadgets and no distractions. We talk. We review past data. We project the future. We laugh. We cry. We set goals. It gets deep. Bring back the conversation, my friends.
Remember, a budget is an estimate of what should happen in future periods. The first attempt may be messy, but you will get better the more you do it. Also, don’t be afraid to amend the budget throughout the year. If an item pops up that will materially affect the bottom line, the budget should reflect it. Once you are in the year of the budget, run monthly Budget vs. Actual statements to compare your progress.
A word on forecast and projections
Forecast and projections are created during the startup phase of a brewery to accompany a business plan or investor packet. Forecast should not be relied upon due to the fact they are predicting the future with little to zero historical basis. With that being said, creating a forecast can be fun if you have the right tools. Forecasts encourage you to play around with the numbers to build different scenarios. A tool we suggest to use is the Score Financial Projection Tool. This robust, free product can help you build the forecast. Another option for building a forecast is outsourcing it to an expert in the industry. Small Batch Standard offers forecasting services. We use our experience to ask the right questions to build the most accurate Balance Sheet, Profit & Loss Statement and Statement of Cash Flows for your project.
Chris Farmand is the founder of Small Batch Standard, a CPA firm helping craft breweries across North America. Chris has more than 10 years of tax and accounting experience, with the last 3 years dedicated to the craft brewing industry. Small Batch Standard believes brewery owners should have reliable financials while focusing on what they do best, making beer. He can be reached at chris@sbstandard.com.
