Watch the full Webinar here.
In October, Live Oak Bank hosted its most popular craft brewer webinar to date called How to Read Craft Brewery Financials. The presentation featured Mary Brettmann, who is the President of Beverage Business Builders. Mary is an experienced CPA and consultant and a well-known resource in the craft brewing industry. Together, we discussed how financial statements are the building blocks of your small business.
Your balance sheet, income statement, and statement of cash flows all work as a collective roadmap showing where your brewery is at and where it is heading next. Each provides valuable information that should be used to set strategies and form or update your business plan. Mary identified the value of each and how they’re connected while suggesting strategies for analyzing and evaluating.
As the webinar host and banking perspective, we asserted the important financing implications that these statements have for future growth. We also reviewed real sample financials and case studies relevant to industry trends. While this presentation offered a macro view of this topic, our question and answer session sparked the most in-depth conversations. Below are the top Q&As from our sessions.
Do most craft breweries under 15,000 barrels of production outsource this type of financial work or do they have internal staffs?
Mary: That’s an awesome question and it’s one that I hear from a lot of my clients. I am of the opinion that it’s really hard to do inventory control if you outsource everything. I do believe that there needs to be at least a resource in the breweries that understands what’s going on.
I also believe that the owners really need to understand at least the basics of the financials. I think you need someone to put this stuff together, and then have the owners take a careful look at it. What I’m afraid of is a lot of owners say, “That’s not my problem. If it’s not beer, it’s not important.” It’s one of the reasons why I did this webinar.
What is the biggest mistake you see in terms of craft breweries assessing their cost of goods sold (COGS)?
Mary: The biggest mistake is that they don’t do it at all and they think of it in terms of a cash basis. Once you get to a $2,000,000 revenue and that’s usually in year two or year three, you need to understand what inventory does and how inventory takes the place of cost of goods sold.
When you get above the 5,000 to 8,000-barrel mark, I think it’s important to start looking at labor and overhead and understanding the true cost of what it takes to make a beer. People do need to pay attention to it. It’s not going to create itself.
Can you talk about down payments or collateral based just on financials?
Live Oak Bank: Down payments on loans can range anywhere from 50% equity in an early stage sort of scenario to really no down payment, no equity into a project for a growing brewery. It all depends on what’s being financed. Collateral again, hard to answer. In one scenario alone, there are so many different cases where the collateral is considered, but I think a short takeaway is that collateral is not necessarily required to get a loan. It’s always helpful, and some of the banks will take collateral when it’s available, but it’s not necessarily required.
Mary: I think another thing to look at is there’s sometimes a disconnect between the balance sheet and the value of your assets. As we talked about earlier, depreciation does have a scheduled basis by which it lowers the value of your stainless. However, everybody out there knows that your stainless has value for more than seven years, so it’s important to take a look at what the fair market value of the stainless is when you’re taking a look at collateral.
Is there a good resource out there that lists ratios for the industry? It would be interesting to compare our business versus the benchmark. Anything out there that you’re aware of?
Mary: Certainly. If you’re a member of the Brewers Association, I believe it is every two years they come out with benchmark and ratios. That’s how the sample financials for our webinar were created. They were created based on what the Brewers Association was seeing and then overall basis. That’s the best resource that I know of out there.
If you have a brew-pub, tap room, and sales to distributors under one physical roof, do you treat each as separate business units or as the same business unit but separate sales cost channels? What is the best practice?
Mary: I treat them as separate businesses at the gross margin line. If you look at our examples, we had all kinds of things going on there. There was an event center, a restaurant, and a brew-pub. Each of those had its gross margin coming down. Therefore, I made sure that all the labor was separated and all of the overhead was going to be applied to each concept, so it stands on its own two feet.
When breweries startup, they typically look at me and say, “That is just too much for me to deal with at this point in time.” I try to grow them to the point where they begin to see and understand how each of those business lines is doing.
Do you include wages in COGS or somewhere else in the income statement?
Mary: I am a big proponent that if it’s direct labor, then it goes into the COGS. As soon as I can get someone in payroll to separate people, even if they’re flexible, I do like to separate them between brewing, tap room, sales, and administrative. I think it helps to fill out the idea of what cost of sale is from the beginning.
It’s also important to do a fully burdened cost. Not only are you separating wages, but you’re separating taxes, workers’ comp, and health insurance. This helps you understand exactly how much it costs to have that person in the brewery and tap room.Read the top #CraftBrew Q&A's from our webinar on Financials here! Click To Tweet
During the rest of this webinar, we continued to discuss self-distribution, recommended accounting systems, more COGS strategies, and other important options for your brewery’s financial needs. Watch the full length version here now.