Josh LanceJosh Lance
Cash Is King: Using Money Well In Your Brewery

Cash Is King: Using Money Well In Your Brewery

Cash may very well be the most important thing you monitor in your brewery.  Running into cash issues can grind your brewery to a halt. It doesn’t matter if you make the best beer—if you don’t have cash, your brewery will not survive. Cash takes a number of different formats in your brewery. Obviously, it’s the money in your bank account, but it’s also sitting in the inventory you have on hand and the receivables and payables you have.  Understanding your cash flow is crucial to monitoring your finances and how you use your money.

Beyond the Bank Account

I’ve talked with many business owners who judge the performance of their business based on the amount of cash they have in their bank account at any point in time.  However, the actions you take in purchasing, operations, and sales may impact your cash balance in ways you don’t see in a bank account balance. The balance of your bank account doesn’t show the health of your business.  

In order to know your true cash position, you need to understand your balance sheet. The balance sheet shows the assets, liabilities, and equity position of your craft brewery.  On the balance sheet there are three key sections that will have a direct impact on your short-term cash flow.

 

  1. Accounts Receivable: Accounts Receivable consists of sales you’ve made that have not been paid for yet. These will typically be from accounts you distribute to that pay your invoice at a later date.  Just because you made the sale does not mean you have the cash in your pocket. Accounts Receivable should be collected upon in a timely manner in order to obtain the cash necessary to fuel your business.
  2. Inventory: Inventory consists of the raw materials (grains, yeast, hops, etc.) and finished inventory (actual beer to be sold).  It’s important to run a lean operation that doesn’t result in having a lot of raw materials on hand or finished beer that has not been sold.  These items represent cash that needs to be produced and sold in order to receive payment on, which in a liquidity crunch may be hard to move if you haven’t been able to sell it already.
  3. Accounts Payable: Accounts Payable represents expenses incurred but not yet paid for.  An example of this might be a purchase of grain or glassware on account that you will pay for in the future.

Knowing what is on the balance sheet, and in these accounts in particular, will help you better understand your cash position.

Analyzing Cash Flow

Knowing your balance sheet means you can analyze it.  There are two key metrics to look at to better understand your cash position. The first is the current ratio.  This ratio is the sum of cash + accounts receivable + inventory (assets that can be liquidated to cash within a year) divided by current liabilities (accounts payable and other accrued liabilities and the current portion of long term debt – the amount of liabilities coming due within one year).  If the ratio is around 1, that means your current assets are in excess of your current liabilities. If the ratio is less than 1, it’s the opposite. A current ratio near 1 or less than 1 means that you have a potential cash crunch, and is a sign you need to bolster your working capital.

The second metric is called the quick ratio. This ratio is the same as the current ratio except we remove inventory from the equation. This ratio is more relevant for breweries in that if you can’t turnover your inventory in a timely manner (i.e. sell beer to turn inventory into cash), you can’t count on it for liquidity purposes.  If you are a brewery in a cash crunch with a bad current ratio, you are likely having trouble selling beer as is. The quick ratio gives you a better viewpoint on what your liquid assets are (I don’t mean beer here!). These liquid assets can be used to pay your current liabilities and will alert you more quickly if there is a cash crunch.

Paying It Forward

Where you stand right now with the quick ratio is good, but you need to understand where you will be in the future.  This is where cash flow forecasting comes into play. With cash flow forecasting you can forecast out your operations and its impact on cash to determine if you’re going to run into cash flow issues and be proactive in making large purchases or major operational decisions.  If you forecast out your cash flow and realize in eight months you will run out of cash, you can make changes now in how you operate so that you don’t run into that situation.

Too Much of a Good Thing

The opposite side of the spectrum of having a cash crunch is having too much cash on hand. While that might be a conservative route to go, having a bunch of cash sitting on the sidelines, and in excess of your current liquidity needs, means you have assets not being put to use. This cash could be used to pay the owners a market wage, to hire new employees, or buy additional equipment.  Utilizing a cash flow forecast that shows you in an excess cash position can allow you to make strategic decisions in the future.

 

The mantra “cash is king” is something craft brewery owners want to take into consideration as they manage their brewery. Understanding your cash position now, analyzing your liquidity, and forecasting into the future are key elements in running a successful brewery.  Those breweries that pay attention to this, are the ones that have the ability to grow and scale without major issues.

About Josh Lance

A licensed certified public accountant (IL) and Chartered Global Management Accountant, Josh is also a family man who calls Chicago home.  Before venturing on his own with a mission to help small businesses, Josh spent his early career at a top-10 national public accounting firm before working at an ultra high net worth family office.  Josh is also an adjunct professor at Northwestern University in Evanston, IL.  He enjoys making wine at home, cooking, traveling, and cheering on his favorite football and soccer teams. Josh was honored by being selected to the 2017 class of the AICPA Leadership Academy and was named as one of the 40 under 40 in 2017 by CPA Practice Advisor.