How To Analyze Your Cash Flow

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

Lifestyle Creep is a Slippery Slope

By: Rich LeBranti

Suddenly you’re paying for a house that is too big, or a lease on a pickup truck you don’t use or just a membership to that fancy gym that you haven’t had the time to take advantage of yet. If your regular expenses are being paid for by credit cards or you can’t seem to save money at the end of each month, you might look toward “lifestyle creep” as the culprit. While it is easy to understand what lifestyle creep is and how it happens, it is still dangerously common among young professionals and those midway through their careers. 

Lifestyle creep or lifestyle inflation happens when you begin to earn more, and your spending increases right along with those paychecks. A new pair of shoes, a nicer apartment, a fancy car. These types of splurges are just the type of choices made by those who are falling victim to lifestyle creep. While, on its face there is nothing wrong with improving your quality of life as you begin to earn more, it is monumentally important that you have budgeted for your existing expenses, have a three-month emergency fund and have made a plan for saving for your retirement. 

Since about 2015, financial advisors have been using a time horizon of 100 years old to plan for their clients’ retirement. That is a lot of years past the time you may be planning to retire. With that comes rising medical costs as you age, inflation and the unknown of how you’d like to live in retirement and what you’d like to experience (and what it all costs). Planning for, saving for and investing in your retirement savings accounts is paramount to protecting your well-being in retirement. 

Lifestyle creep doesn’t happen overnight. Sometimes it’s hard for people to notice that it is even happening until suddenly they’re over extended financially. Putting off saving in order spend on the things that you want or feel you need right now is a slippery slope and suddenly you may find yourself way behind your goal when it comes to your retirement plan.

When your expenses equal your income and there is no room for savings, you are putting yourself in a position where you don’t have any buffer when something comes up that you really do need money for. That is usually when people begin getting into debt. Using credit cards to pay for monthly expenses or using credit cards to fund unexpected large expenses and not being able to pay them off completely each month is the risk. The interest on your credit cards alone is now causing you to be paying 15% more for each item you buy. 

So, what can you do to avoid lifestyle creep? Here are three recommendations that we think curb the problem: 

1. Make a Budget

The only way to understand and change how you spend your money is by recording what you are spending and keeping track of it monthly. You must first put continuing and unavoidable expenses as the first priority (rent or mortgage, car payment, insurance, utilities, student loan payments, etc.). Then you must consider what you will need for household items like groceries, toiletries, cleaning products, pet food, etc. Once you have a handle on what those relatively fixed expenses are, then you need to determine what you will be saving each month for your emergency fund and for your retirement savings account whether it is a 401(k), IRA or another vehicle. Now is the fun part: Figuring out how and when to spend your disposable income! Our recommendation: Always choose experiences over stuff. Those memories last a lifetime. 

2. Try NOT to increase your expenses every time your income goes up.

Just because you’re making more money doesn’t mean you need to spend more, especially not immediately on frivolous items. It is good to set goals for hard earned wage increases and reward your good work with something that has true value or true necessity. You may be planning to get married, have a child, buy your first house or your first born is going to college in a few years. Using that raise as a vehicle for ramped up saving is a great way to curb your impulses and plan for a bright future.

3. The Gig Economy 

Having a side hustle or the opportunity to work freelance outside of your nine to five is a great way to earn extra cash and a great way to save if your paycheck and your expenses simply must stay neck and neck for the time being. According to a recent article in Forbes, the average side hustle earns workers about $8,000 per year in extra income. That would more than fully fund a Roth IRA for the year and not take a bite out of your paycheck. 

Spending on new toys (big or little), memberships you can’t really afford, and other frivolities can lead you to an outcome that may make you have regrets down the line. Prudence and patience are key to avoiding these common mistakes that lead to lifestyle creep. We hope that you take heed of our recommendations and that implementing them into your life helps you stay on the track to financial freedom.