Starting and running a brewery with a taproom can be an exhilarating venture, whether you’re new to the business or have been brewing for years. However, ensuring the financial health and sustainability of your operation is crucial. This blog post explores the top three drivers of cash flow from operations: profitability, inventory management, and accounts payable management. By focusing on these areas, you can maintain a steady cash flow and keep your brewery thriving. Cash is king and we’ll show you how to make the most of it.
Profitability
Profitability is the backbone of any successful business, and your brewery is no different. All cash flow analysis starts with profitability. Essentially, it is your business model that will determine part of your cash flow strategy.
Here are some strategies to enhance profitability:
- Pricing Strategy
- Evaluate Costs: Regularly review your production costs to set competitive yet profitable pricing. This isn’t to say to set your prices based on your costs, but this will help you identify items that either have low profits and should be scrapped or items with high profits that aren’t moving well, indicating a price adjustment is needed.
- Market Research: Understand your target market and adjust prices to balance customer expectations and profit margins. This will have a lot of facets, from how your competition is pricing to how your value-added benefits impact your target market. Value-added benefits include the overall taproom experience (i.e., “vibe”), how interactive your servers are with guests and the overall quality of the food and beer you serve. Value-added benefits allow you to charge a higher price than your competition if you are differentiated enough from them.
- Cost Control
- Monitor Expenses: Keep a close eye on both fixed and variable costs. Look for opportunities to cut unnecessary expenses without compromising quality. We have an excellent blog post about this, which can be found here
- Efficiency Improvements: Invest in technology and processes that enhance operational efficiency, reducing waste and optimizing resource use. Review your processes and procedures for efficiency improvement. Tasks that are considered “labor bombs” whould be looked at with a critical eye. Sometimes, they may make sense but other times it’s just plain inefficient and costing money when it could be done better, or in some cases not at all.
- Revenue Streams
- Diversify Offerings: Consider introducing new products or services, such as exclusive taproom events or merchandise, to attract more customers and boost sales. This is becoming a very big opportunity for breweries, especially with taprooms. Whether it’s offering NA options of your beer or hop-water or if it’s offering niched music events (like one brewery I heard about on a podcast that does jazz night to target their older customer segment).
- Loyalty Programs: Implement programs to encourage repeat business and increase customer retention. This can be as simple as the common loyalty programs offered by most modern POS systems where guests earn points and can redeem the points for discounts or mug club style membership programs.
Inventory Management
We all know that brewing beer is inventory intensive, well beyond many other industries in food and beverage. Efficient inventory management is key to maintaining healthy cash flow. Properly managing your inventory ensures that you have the right amount of stock to meet demand without tying up too much cash.
Here are some concepts to help with inventory management:
- Accurate Forecasting
- Sales Data Analysis: Use historical sales data to predict future demand and adjust inventory levels accordingly. The industry is no longer in the priod of “if you brew it they will come” and making sure you forecast customer demand is crucial to understanding the cash flow needed to invest in your inventory. Developing a process so you can plan out the next 12 months of brews is a great way to manage this. By doing this on a rolling basis you can always have a plan ready for the next 12 months and have a good grasp on the cash needs of the operation.
- Seasonal Trends: Take into account seasonal fluctuations and plan your inventory purchases to avoid overstocking or stockouts. This goes hand-in-hand with understanding customer demand. Not only do you need to be aware of periods when sales slow down (ie winter months, especially in colder climates) but also the style of beer that is in demand during those seasons.
- Inventory Turnover
- Monitor Turnover Rates: Regularly check how quickly your inventory is sold and replaced. High turnover rates indicate efficient inventory management. This is a great metric for operations to use to monitor how effective inventory management is. Ultimately, the goal is to move through product before adding more product.
- Reduce Obsolescence: Avoid holding onto outdated or slow-moving products that can consume valuable storage space and capital. This can happen with unpopular beer, and as much as breweries don’t want to discount their beer, sometimes you need to in order to move beer that doesn’t get ordered frequently. It’s far better to sell beer at half off than it is to dump it.
- Supplier Relationships
- Negotiations: Establish strong relationships with suppliers to negotiate better terms, such as discounts or favorable payment terms. The better relationship you have with a supplier the easier it is to get these discounts and payment terms.
Accounts Payable Management
Effectively managing your accounts payable ensures you maintain good relationships with suppliers while optimizing your cash flow.
- Payment Terms
- Negotiate Terms: Work with suppliers to secure longer payment terms that allow more flexibility in managing your cash flow. This can be NET30 or longer for beer ingredients and supplies.
- Early Payment Discounts: Take advantage of discounts offered for early payments when it is financially beneficial. If you have a good level of cash taking advantage of early payment discounts will save you money and increase profitability.
- Cash Flow Timing
- Align Payments and Receipts: Try to synchronize your payment schedules with your cash inflows to maintain a positive cash flow balance. In the brewing world, it takes some time to convert beer into cash. By aligning your cash outflows to when you start to generate cash from selling beer helps to improve cash flow.
- Prioritize Payments: Strategically prioritize payments based on due dates and potential penalties for late payments. This is helpful when cash is tight or projected to be tight. Always be sure to notify suppliers of any late payments and only pay a vendor late if it won’t harm the relationship or if it doesn’t cost anything extra. While this isn’t a sustainable way to improve cash flow, it can offer some short term relief when things are tight.
- Monitoring and Reporting
- Regular Reviews: Regularly review your accounts payable to ensure accuracy and timely payments. Always pay your bills on the due date unless they offer an early payment discount. There is no reason to pay a vendor early if there is no incentive to do so.
- Automated Systems: Implement automated accounts payable systems to streamline processes and reduce human error. There is a myriad of apps that can help with this. The best part is many have approval workflows so cash flow can always be monitored and controlled.
By focusing on these three drivers—profitability, inventory management, and accounts payable management—you can significantly improve your cash flow from operations. This will not only help in sustaining your brewery but also in paving the way for future growth and success. Stay diligent, adapt to changes, and continuously seek ways to optimize your financial practices.
