Running a brewery isn’t just about crafting the perfect beer; it’s also about ensuring that your business is financially sound and sustainable. One key performance indicator (KPI) that stands out in this regard is Return on Invested Capital (ROIC). But have you ever wondered how your infrastructure capital plays into this? In this blog post, we’ll explore the concept of infrastructure capital and its significant impact on your brewery’s ROIC. By the end, you’ll have a clear understanding of how to manage and optimize this aspect of your business to ensure long-term success.
Understanding the Basics of ROIC
First, let’s recap why ROIC is so crucial. Essentially, ROIC measures the return a company earns on the capital it has invested in its business. For brewery owners, this means understanding how effectively your investments are generating profits. High ROIC indicates that you’re using your capital efficiently, which is vital for attracting investors and ensuring sustainable growth. We covered this topic briefly in our blog post Top 3 KPIs for Breweries, Restaurants, Retail and Other Small Businesses .
What is Infrastructure Capital?
Infrastructure capital includes the long-term investments and fixed assets essential for your brewery’s operations. These can range from brewing equipment to the physical premises of your taproom. Understanding the components of infrastructure capital can help you make informed decisions about future investments and upgrades.
Components of Infrastructure Capital
- Fixed Assets: These include the buildings, machinery, and brewing equipment essential for production.
- Long-term Investments: Investments in technology, real estate, or other assets that provide long-term benefits.
- Depreciation and Debt: The impact of these factors on your overall capital.
Impact of Depreciation and Debt
Depreciation reduces the value of your assets over time, impacting your ROIC. Similarly, debt used to finance these assets can either boost or impair your financial stability, depending on how well it’s managed.
The Importance of Infrastructure Capital in Business Growth
Investing in infrastructure capital is not just about maintaining current operations. It’s also about enabling future growth and scalability. When done right, these investments can support your brewery’s ability to expand product lines, increase production capacity, and improve overall efficiency.
Supporting Business Scalability
Infrastructure investments allow your brewery to scale operations smoothly. This means you can meet increasing demand without compromising quality or efficiency. For example, investing in larger brewing equipment or expanding your taproom can help you keep up with a growing customer base.
Enhancing Operational Efficiency
Efficiency is key to maintaining a high ROIC. Investing in infrastructure capital that improves operational processes and reduces waste can lead to significant cost savings. This includes upgrades to technology, machinery, and other assets that increase productivity and reduce maintenance costs.
Measuring and Managing Infrastructure Capital
To make the most of your investments, it’s essential to measure and manage your infrastructure capital effectively. Here are some best practices to consider.
Calculating Infrastructure Capital
Accurate calculation involves assessing the value of all long-term assets and investments. This includes accounting for depreciation and any debts associated with these assets.
One of the key chart of account design work we offer at Lord CPAs for our brewery and taproom clients is the classification of group assets and debts for the calculation of Infrastructure Capital. We categorize any debt associated with the purchase or improvement of assets as “Debt – Asset Support,” while all other debts are classified as operating debt.
If we can identify specific debts linked to particular assets, we can further refine this classification to “Debt – Asset Support – Brewery Equipment,” for instance. Additionally, we maintain accumulated depreciation accounts for each category of fixed asset. For a brewery, this means having separate accounts for “Brewery Equipment” and “Accumulated Depreciation – Brewery Equipment.”
This structured approach allows us to determine the net value for each type of asset. Consequently, we can calculate Infrastructure Capital based either on individual asset types or in aggregate, depending on the size and nature of the business.
Managing Debt and Improving ROIC
Effective debt management is crucial. Strategies such as refinancing high-interest loans and leveraging tax benefits can help improve your ROIC.
Challenges in Managing Infrastructure Capital
While infrastructure capital is vital for growth, managing it comes with its own set of challenges. Awareness of these pitfalls can help you avoid common mistakes.
Common Pitfalls
A prevalent issue is the tendency to over-invest in infrastructure without a clear grasp of the anticipated return on investment (ROI). This often arises from a lack of understanding of Infrastructure Capital calculations or insufficient profitability, making it difficult to determine the potential gains from such investments.
Another challenge is the failure to maintain and upgrade existing assets, which can result in rising operational costs and diminished efficiency. One effective solution is to establish maintenance contracts with service professionals, ensuring that equipment is regularly cleaned and serviced. Additionally, using your depreciation expense as a guideline can help you determine how much to save for future repairs, upgrades, or replacements, making it easier to manage these necessary investments.
Balancing Capital Investment and Financial Stability
Striking the right balance between investing in infrastructure and maintaining financial stability is crucial. This involves careful planning and ongoing assessment of your investment’s impact on your business’s overall financial health. Working closely with financial professionals can help you navigate this delicate balance and ensure the best use of your infrastructure capital.
Conclusion
Infrastructure capital plays a pivotal role in your brewery’s ROIC and overall success. By understanding its components, importance, and the challenges involved, you can make informed decisions that support long-term growth.
Monitoring and optimizing your infrastructure capital is not a one-time task but an ongoing process. If you’re unsure about how to proceed, get in touch with us and we can provide valuable insights and strategies tailored to your unique needs.
Ready to take your brewery to the next level? It’s time to focus on infrastructure capital and ensure your investments are working as hard as you do. Reach out to to our firm by clicking the Get Support button at the top of this post.
Cheers!
