3. Profit planning
Your decision to open a brewery came with some sizable risk. The result of this risk is, hopefully, profit. Budgeting should be the cornerstone for determining how to grow profits. When you look at all your revenue sources, which one has the highest profit margin? Wholesale? Retail? Events? Don’t assume it is retail sales because your buddy down the street says it is. Yes, retail is very profitable; however, the way you manage the expenses associated with that revenue stream is critical, which is why you need to know your profit margins. This knowledge should help validate business decisions such as hours of operation and sales goals. Master this one, and you will have the financial freedom to spend or save.
Budget time usually brings up interesting conversations at the brewery. By interesting, I mean hard conversations. In business, with all our spreadsheets and equipment, we sometimes forget to dial it back and have a conversation about the things that do not feel right. This is why I love the budget process. We seem to always uncover an issue. Issues in business are good because without issues we would all get bored. The issue may not be affecting the numbers now, but left alone long enough and it will.
My experience with budgeting has showed me the power in having conversations about the numbers. Knowing this, my sessions tend to resemble the following: Owners and myself, locked in a room for up to four hours with no gadgets and no distractions. We talk. We review past data. We project the future. We laugh. We cry. We set goals. It gets deep. Bring back the conversation, my friends.
Remember, a budget is an estimate of what should happen in future periods. The first attempt may be messy, but you will get better the more you do it. Also, don’t be afraid to amend the budget throughout the year. If an item pops up that will materially affect the bottom line, the budget should reflect it. Once you are in the year of the budget, run monthly Budget vs. Actual statements to compare your progress.
A word on forecast and projections
Forecast and projections are created during the startup phase of a brewery to accompany a business plan or investor packet. Forecast should not be relied upon due to the fact they are predicting the future with little to zero historical basis. With that being said, creating a forecast can be fun if you have the right tools. Forecasts encourage you to play around with the numbers to build different scenarios. A tool we suggest to use is the Score Financial Projection Tool. This robust, free product can help you build the forecast. Another option for building a forecast is outsourcing it to an expert in the industry. Small Batch Standard offers forecasting services. We use our experience to ask the right questions to build the most accurate Balance Sheet, Profit & Loss Statement and Statement of Cash Flows for your project.
Chris Farmand is the founder of Small Batch Standard, a CPA firm helping craft breweries across North America. Chris has more than 10 years of tax and accounting experience, with the last 3 years dedicated to the craft brewing industry. Small Batch Standard believes brewery owners should have reliable financials while focusing on what they do best, making beer. He can be reached at [email protected].