By: Jason Alexander
Updated May 2022
We’ve all heard the old adage that cash is king. But brewers are often more focused on sales growth than cashflow. Yes, sales growth is fundamental, but cashflow is the primary driver of financial health.
This holds especially true for the brewing industry, which on average requires $500k-$1.5 million in capital expenses just to get started. Whether or not a brewer can cover monthly payments with operating cashflow (i.e. not rolling debt over and over) will be essential.
Cashflow is defined most simply as ‘where the business is getting money from and how is it being used.’ While this explanation seems simple, getting to initial cashflow forecasting can be complex, requiring hours of analysis of historical expenses and revenue to create assumptions. Then, what reporting method will be used? Will it be a “12 month sources and uses” schedule, or maybe a rolling 13-week forecast? Whatever method selected, it must be then updated monthly or weekly to stay accurate.
The upfront work may seem daunting. But once a brewer puts in the hard work to get visibility into cashflow (often with the help of a strategic financial resource), the payback is big. The data can be interpreted and applied to adjust business decisions and operations to improve overall business health, preventing financial strain before it is too late to act. It may also be a requirement to hit future business milestones (ie. securing a loan).
Below are few key ways brewers can apply cashflow projections and take actionable next steps:
Manage & Grow Strategically – At the highest level, accurate cashflow projections allow a brewery owner to begin anticipating changes in cash rather than reacting to them – positioning brewery leadership to manage strategically. Cashflow projections are not only important for managing day-to-day operations, but for planning growth and expansion. An owner managing cash based on the balance in the bank account is like driving looking out the back window.
For example, without cashflow forecasting, a large equipment purchase may be made at an inopportune time – a time when other large expenses are hitting simultaneously, perhaps alongside tax liabilities being due, straining cashflow and the business. With good cashflow projections, we would predict the timing is not right in the first place and schedule that investment at a different, more strategically planned month or look for alternate ways to finance this purchase versus using cash needed for operations.
A cashflow forecast will also project the brewer’s financing needs in advance, allowing leadership the time needed to secure funds. If a loan is needed for a growth or expansion (i.e. the business owner is not putting up their own cash), banks will look for company cash flow as the main source for the repayment of the loan. The loan approval process can also take up to a few months, so knowing this need further out increases the likelihood of on time approval.
Staffing decisions are another strategic application of cashflow projections. With accurate projections, a brewery can model exactly how many employees the business will need to hire and when. This allows the owner to plan for the increase in cash needed for salaries, benefits, and wages.
Improve Collection & Payables Processes – Monitoring cashflow will allow a business to see when A/R terms are not ideal for the business and afford an opportunity to negotiate terms to collect more revenue upfront or faster. Breweries operating a distribution-focused model, for example, may have a high amount of Accounts Receivables, and rely on this cash being collected sooner than current Days Sales Outstanding (DSO) actuals. Cashflow projections will project the timing of receiving the cash and keeping cashflow actuals up-to-date will tell us when those deposits are actually hitting, and whether those timings are posing a problem for the business’ overall cashflow needs.
Accurate cashflow projections will also ensure enough cash on hand for Accounts Payable and anticipate outflows (debt payments, inventory purchases, etc.), enabling the business to protect valuable vendor relationships via on time, reliable payment. Healthy cashflow could also enable a brewer to pay vendors early to receive discounts, generating even more cash thru additional profitability.
Build Reserves Health – Putting away for a rainy-day fund is much more likely to happen if it is planned for and talked about. Cashflow projections may show building reserves as an impossibility right out of the gates. Accurate cash flow forecasts will identify the most opportune months for the business to begin putting away for a rainy-day fund. Tip: It is a best practice for small businesses to save up two months of operating expenses and ensure that tax liabilities are covered before beginning distributions to investors.
Vet New Revenue Sources – Let’s say that a brewer would like to update their model to begin shipping beer direct. With an extra line of business coming on board, it’s important to anticipate breakeven and payback. Cashflow projections can help the business to know what that will look like and whether the new revenue source model is teed up for success. After analysis, the brewer could determine the timing of the launch of a new product is not correct, or the pricing model needs to be adjusted prior to launch to accelerate breakeven and payback.
Prepare for Tax Liabilities – Mentioned briefly in reserves health section above, a holistic cash flow projection will take into account all tax liabilities and set aside cash on a regular basis to pay those liabilities when they are due. While many brewers may have little to no tax liability when first starting out, it is still important to confirm and anticipate any taxes owed and ensure a provision is made for those.
Inform Debt Management & Restructuring – If cashflow projections show recurring debt payments as the primary culprit for cashflow challenges (and with most brewers taking out large upfront loans the odds are they may be), the business may want to consider restructuring existing debts. Projections allow the business to take preemptive action and focus on strategic debt management before words like ‘bankruptcy’ or a brewery ‘change of control’ enter the vocabulary. Cashflow projections might also take into account line of credit terms. Let’s say a brewer is required to pay down what is owed to zero on a regular basis (banks call this the “sunset provision”). The cashflow model will need to take that into account.
At the highest level, accurate cashflow projections allow a brewery owner to begin anticipating changes in cash rather than reacting to them
Remember, cashflow might look different each month. The timing of checks rolling in can change, insurance and taxes might be due. Maybe it’s a longer month so there is an extra payroll. Once created, it’s important to continue updating the cashflow model and that communication around it remains active. Bonus, the communication around cash will over time force better and more frequent discussions among leadership and other parts of the business.
Whether the brewery is healthy or in a dire situation, now is the time to find a resource to help with cash flow analysis and with building the brewery’s cashflow projection model. I hope the above shows that cashflow projections are more than just a nice-to-have reporting tab, but actionable data for informed business planning no matter a business’s financial situation.
About The Author – Jason Alexander is a CFO and business consultant for Lucrum Consulting, Inc. Jason brings over 15 years of accounting and financial management experience working with a diverse client base including insurance, distribution, manufacturing, professional services and talent acquisition. He has served in financial leadership for several Charlotte, North Carolina-area businesses. You can reach him at firstname.lastname@example.org.