CPA Q&A: Knowing Your Numbers With Beverage Industry Leaders
Understanding your business’s metrics and accounting data is one of the most important parts of running a successful brewery or winery. From breaking down the lingo to calculating changes and goals, it’s a lot to manage. To help you keep tabs on the basics, we sat down with Maria Pearman, CPA, and Josh Lance, CPA, at this year’s Ekos_Con — Ekos’s annual users conference. Keep reading to learn about KPIs (key performance indicators) alcohol producers should focus on, daily best practices, and more.
According to Maria, KPIs are really just shorthand for your business’s overall financials. Instead of having a mass of super dense information to track and digest, KPIs allow you to track just a few key metrics to see whether you’re on the right track. Here are a few of Maria and Josh’s top-tier financial KPIs and metrics craft producers should track:
- Net income: Total revenue – expenses and operating costs = net income. Maria calls this KPI a “critical, bottom line” calculation.
- Number of weeks of cash on hand: You always need a backup plan. So, if you know how much cash you have on hand, you can quickly understand your business’s liquidity.
- Gross margin by package type: Separating your gross margin by package type is going to give your financials further context — what’s selling? Maria recommends that breweries at least separate this into kegs and packaged products.
- Quick ratio: A measure of liquidity, quick ratio = cash + accounts receivable / liabilities. Josh and Maria agree that, frequently, cash is king. It’s essential to maintaining a healthy business! Maria also points out that you can’t pay bills with inventory, so this shows what you have in short-term cash to pay off liability.
- Percent of complete and accurate deliveries: If you’re working with a wholesaler, the market is so crowded that you cannot afford to mess up your orders! Measure the completion and accuracy of your deliveries to set expectations for you and your team when it comes to delivering what you promise.
- Sales channel mix: You should keep tabs on what’s selling in retail, wholesale, and direct-to-consumer. Maria says legislative changes because of COVID will continue, especially when it comes to DTC. Keeping an eye on your sales channel mix means you can learn where you need to push forward, draw back, and know where money comes from in your business.
- Week-over-week metrics: Tracking how many customers are in your taproom, how your taproom and to-go sales are progressing, and other short-term, week-over-week metrics are going to give you a good look at the health of your taproom according to Josh. This will also allow you to easily track whether events and marketing campaigns are working.
Numbers are tricky, and sometimes it’s a challenge to understand which data points you should be paying attention to. Josh and Maria shared things they’ve seen business owners get tripped up on or distracted by.
Focusing too much on revenue is the #1 mistake Josh sees craft producers making. He says there are frequently too many expectations placed on revenue for indicating a business’s health. However, if your revenue is only up in the taproom and not across other channels, it’s not that profitable. When you focus on the top line number, it’s easy to fall into a false sense of security. When you miss the details for the top-line number, you can lose money just as fast as it comes in the door. To combat this, be sure you’re taking a look at other KPIs beyond revenue to gain a more accurate picture of how your business is doing.
When it comes to inputs like raw materials and packaging, Maria frequently sees producers make the mistake of obsessing over prices. Supply chain issues, the state of the economy, and more can affect prices of various raw materials — but panic buying doesn’t help anyone. If you’re sacrificing the health of your cash flow to buy in bulk at a certain price, you’re putting your business in a risky position when it comes to liquidity. Maria recommends that you have a rolling cash forecast that’s updated every month — everyone should have at least 10 weeks of cash on hand at any given time. While doing expansions and other improvements will squeeze your cash flow for a time, having a forecast will help you understand how much money you should be spending and when you’ll be back on track.
Now that we’ve addressed what not to do, let’s look at a few best practices and what you should be doing when it comes to accounting and metrics.
- Seek out software: Some software programs, like Fathom, plug into data sources and can give you great reports that explain what’s happening with your numbers, Maria said. These programs are key for explaining financial data to non-financial audiences. Many of your KPIs will have software that’s tailored to your goals, but you might have to layer these solutions or use multiple programs to get exactly what you’re looking for — that’s just a part of the process.
- Develop a reporting rhythm: You should schedule time with your team on the same day or week each month to look at your business’s KPIs and see how you’re doing. Maria recommends that every department presents one assigned KPI at each of these meetings, which will help with buy-in. You don’t have to practice open book management, but Maria has seen the success of this method over and over. When you share numbers with your team — not just misses and wins, but also the reasons why numbers look the way they do — they are more likely to support the business’s goals and generate motivation among their team members.
- Crawl, walk, run: Josh says you shouldn’t try to take on too many KPIs at once: 20-30 is just unmanageable. Instead, focus on two to three at a time with six-, nine-, and 12-month timeframes. Focusing on just a few at a time is going to allow your team to see trends, understand the health of the business, and digest information properly.
Digging into your business’s metrics is a worthwhile challenge to take on. When you understand the health of your business fully, you can make better decisions for your team and lead your business to success.
Maria Pearman has more than 15 years of experience in accounting and advisory services, especially for beverage and alcohol industries clients. She is also the author of Small Brewery Finance, a book published by the Brewers Association to help small breweries run their businesses more successfully. For more information about Maria or to get in touch with her, click here.
Joshua Lance is the founder and managing director of Lance CPA Group, an accounting firm specializing in helping entrepreneurs — from craft breweries to startups — grow and manage their businesses. Joshua was recently named to Accounting Today’s list of the 2022 MP Elite, featuring the top 10 managing partners for accounting firms. For more information about Josh or to get in touch with Lance CPA Group, click here.