Too many brewers live on the edge when it comes to cash flow management. A majority of brewery owners manage cash in their head or on a piece of paper that projects only the next couple of days. Others only do it when it comes time to pay bills, process payroll, or when cash is low. These approaches can be dangerous and don’t provide enough information nor time to act. In this article, I walk you through a process to manage cash in Excel that is simple to use and manage. A link to an illustration is at the end of this model.
STEP 1 – Determine a period to forecast cash flow
Usually, I recommend projecting out three months at a time and for each month, breakout inflows and outflows between those that occur in the first half and those that occur in the last half of the month. Some do this just monthly or on a weekly basis. There is no right or wrong method and it comes down to personal preference and time you wish to spend updating and analyzing this schedule.
STEP 2 – Estimate cash receipts
For those who wholesale beer, start by looking at your accounts receivable aging report. Look at your receivables and use the best information you have available about your customers, anticipate when you think you may receive payment and add that into the proper month in your schedule. Also consider credit terms and payment terms you offer and how that would impact the timing of cash receipts.
Taprooms can be tricky. Unlike wholesale revenue where we know what is owed to us, we don’t really know what our taproom will produce. In trying to estimate taproom sales use these helpful hints:
· Consider using the prior three months average cash receipts and adjust for special events you may be having. Also consider seasonality trends or the results of the same time period in the prior year as a base line.
· For new taprooms, do a little market research. Reach out to other brewers, the Guild, visit similar size locations and observe the volume. Also give your self a little bump for that “newness” factor.
· Don’t use an estimated sales number here. Use deposits (for example, the amount from a Square deposit report) because deposits are net transaction fees and include amounts collected for sales and meals taxes or tips, which offset other disbursements like tips paid out in payroll or remitting taxes to the DOR for sales and meals tax. Using a deposit number ensures this is captured and don’t over or under budget cash flow.
· Consider special events that you plan on having as well.
STEP 3 – Estimate cash disbursements
Here comes the part that requires the most time and energy: mapping out your future disbursements. To help in determining disbursements, a good place to start is looking at the last three months of bank statements and reviewing your profit and loss. Summarize recurring transactions with vendors, take note of those that could be reduced or eliminated, and organize them into some basic categories. Categories that I have found to be beneficial are:
· Automatic fixed monthly payments – things like equipment lease payments, subscriptions, or other payments that get automatically pulled from your account and have fixed amounts.
· Recurring expense payments – amounts that are recurring but tend to change month to month or are not automatic payments such as rent, payroll, benefits, excise taxes, utilities.
· Inventory – hops suppliers, grain suppliers, cans, chemicals, etc.
· Loan payments – monthly loan payments like SBA loans or investor notes.
· Equipment purchases – planned capital expenditures such as new tanks, cost to setup a new tank, and additional inventory needed for such a tank.
· Other variable expenses – other miscellaneous costs can go here. Often, I notice that most like to put a category here for those one-time unplanned costs to have some “catch all” bucket. If you notice you are consistently over in this category, double check to see if you need to categorize something differently or if you are spending on things you necessarily don’t need.
This is not all inclusive and not, by any means, a one size fits all. I encourage you to tweak the model in a way that works best with your brewery. We break out costs between automatic and recurring so you can try to control the payments during the period with stronger cash flows to prevent risk of over drafting your account.
Let’s talk about credit cards and how to factor them in. While charging expenses necessarily doesn’t decrease cash at the time of the expense, we are incurring a cost that does need to be paid in a short period of time. The only difference is you can partially pay your statement and run up a balance. We want to include these charges because we want to see how they impact cash – do we have the cash to pay now or later? Do we have the cash to prevent a large balance and prevent credit issues? Running up a balance on credit cards that can’t be paid off in a short period of time is a good leading indicator of cash flow problems.
STEP 4 – Determine our change in cash
Now we need to determine how we did by taking our projected (and actual) cash receipts and subtracting cash disbursements. The difference is known as our net increase or decrease to cash. Hopefully our receipts exceed our disbursements and we are positive for the periods. If we are, we should be generating enough cash to cover costs and generate a profit.
If we have negative months, then we need to investigate. It’s not uncommon to have a bad month here or there but consistent negative months is not okay. Really dig into the results and investigate to see if there are any trends or issues you can get ahead of before it’s too late.
Final Thoughts
I would encourage you to try this for a couple of months and really analyze your cash flow. Look at where you are over or under budgeting and drill into what is happening. Try to incorporate this into your operations by aligning cash inflows with special events and outflows needed in advance to prepare for those events. Creating such a link can help project future cash shortages and give you the time needed to prepare. It can also help show a future surplus which you can then match to a large purchase and reduce the need for short term loans or take that bonus you deserve!
Please don’t hesitate to reach out with questions or for help when trying to implement such a process!
HERE’S AN ILLUSTRATIVE EXAMPLE
Cheers,
Bob Babine
rdb@edelsteincpa.com
