(WARNING:Fairly technical and philosophical stuff contained within, proceed with caution)
What does it mean to be profitable as a craft brewery or food crafter? Your tax return will probably tell you that profit is your cash receipts from sales less cash expenses, whether those cash flows cover months in the past or future (ie real estate taxes or insurance). Some people will tell you that this is an OK way to view your business.
But it isn’t. Your tax return is meant to tell you your tax liability. And simply accounting for profit from cash inflows and cash outflows is only meant to tell you cash flow from operations.
But there’s another way…
I like to view profit as the excess value that a customer is willing to pay for the value your vendors, employees, financiers, and investors provide as a collective. In other words, profit is the excess of the sum of a collective effort over the individual effort of each stakeholder. In this way every dollar that flows through your business is associated with an interaction with another human being.
Sounds a bit weird, I know. But when you view your business in this fashion you will more accurately estimate profit than in any other way out there and hopefully use that to create a sustainable view of your business.
Let’s break this down a little further to make some sense of it. There are 3 components to profit. Revenue, or sales for most of us in the food and beverage world. Cost of goods sold, or the direct costs that go into creating the product being sold. And operating and other expenses, or all of the other costs needed to get your product to customers.
Sales is the easiest part of the profit calculation in most craft brewery and food craft enterprises. Sales are made when a customer receives beer or food. Basically this means when an order is considered fulfilled; whether it is a ticket being closed out in a POS or an order being shipped to the customer and accepted. It doesn’t necessarily have to be when money is received in your bank account. Hell, credit card transactions even take a couple of days to get into your account. In this way, sales are really the product your customer gets which is the sum of the collective effort of the business.
Cost of Goods Sold
Cost of goods sold are the costs raised by production employees and vendors who provide ingredients during the production of your food or brew. However, these costs are not necessarily related to cash flow but rather to the what the employees and vendors provide in order to create the product at the time of production. Think about this, the rate you pay a brewer or baker, and the rate you pay per pound for grain or hops, is ultimately the price you are willing to pay for the ingredients and creators of the products being sold. So, cost of goods sold can be viewed as the value individuals, employees and suppliers, are providing to the collective effort to create a product worth it for a customer to buy.
Operating Expenses and Other Expenses
Operating expenses are expenses like utilities and real estate taxes; expenses that are related to operating the business but not directly related to production. Once again, though, these expenses don’t match the cash flow. Other expenses are things like interest paid to investors or financiers, depreciation. Once again, these expenses don’t follow cash flow either. Sometime interest is accrued when it isn’t paid, and depreciation is the slow dribble of expense for a huge cash outflow for equipment. Nonetheless, these operating and other expenses can be viewed as individual and usually collective efforts being provided to the collective effort of creating a product worth it for a customer to buy.
This is what the collective of the business (employees, suppliers, vendors, financiers and owners) generated in excess of what they would do individually selling the same product. Because ultimately, someone could go out and buy some beer at retail and sell it at retail, but it takes collective ingenuity to create your own product that is enjoyed by customers in a sustainable fashion where the whole collective benefits.
I hope this helps present a different way to think about your business and I welcome all comments on this. Shifting the way we think about something important to us can be difficult and Lord CPAs can provide support and accountability during that time. Contact us if you are interested in learning more about this.