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.