First and foremost, let's get right down to it.... If your craft brewery, brewpub, or taproom is out of cash flow; your craft brewery, brewpub, or taproom is pretty much out of business. Trying to run a brewery without managing cash flow is like trying to paddle a boat without an oar. Or like brewing beer without grain, hops, yeast or water. Cash flow is important for all breweries, but it is even more critical for breweries under 1 year. If you cannot manage your cash flow within the first year, the chances of you surviving year two is nil.
The three key elements of your cash flow analysis include:
- Accounts receivable: What customers and clients owe you.
- Accounts payable: What you owe your suppliers.
- Shortfalls: You hope not to have these, but they do happen.
Here are a few tips to help you row your cash flow boat successfully:
Determine Your Break Even Point - You should know when your brewery will become profitable, not because it will affect your cash flow, because it won’t, but because it gives you an early goal to strive for and a ready-made target for projecting future cash flow. Negative cash flow and negative profits make for a grim combination. Focus your efforts on managing your cash flow with an eye toward reaching that moment when you realize your first profits.
Focus on Cash Flow Management, Not Profits - This may sound contradictory to #1, but it’s not. Use your break even point as a benchmark. After you reach break even and your brewery is profitable, you still need to manage your cash flow, of course. You have reached another stage of your brewery’s life.
Maintain Some Cash Reserves - You will have cash shortfalls. Your brewery’s very survival may depend on how you maneuver through those shortfalls. If you start with some cash in your bank account, it will be easier to focus on cash flow and you won’t stress about the shortfalls.
In order to deal with this shortfall, a cash flow loan may be your best option. For this type of brewery financing, lenders provide you funds and use your future expected cash flow as collateral for the loan. You’re essentially borrowing from cash that you expect to receive in the future by giving the lender the rights to a predetermined amount of these receivables. These are primarily used for working capital or take advantage of short-term ROI opportunities. Your credit scores will usually be checked, but they play less of a role. As the name indicates, the lender is more concerned with inspecting your cash flow (usually bank statements) to approve your application. Turnaround time is another great feature of a cash flow loan, as funding usually takes place in a matter of days.
Know Your Debt Level - When assessing how to fund growth, it's essential to calculate how much debt you're already carrying, and your comfort level adding to that debt. If you have sizable debt, additional borrowing could have a negative impact on your credit rating, which is never a good position for a small business. And your ability to secure a loan and get favorable terms will be partly dependent on existing debt as well as other elements of your financial and business profile. If you're carrying a manageable amount of debt and can secure a loan or line of credit at competitive rates, then credit may be the best option. However, if your debt level makes you or your lender uncomfortable, then perhaps establishing the discipline of using cash to methodically fund growth of your business could make the most sense.
Collect Receivables ASAP - Keep net 30 and net 60 terms in contracts to a minimum. If necessary, delegate the task of keeping an eye on receivables and contacting customers periodically to collect payment to a trustworthy, persistent member of your team.
Need a Financing Solution to Collect Early on Accounts Receivables? Accounts receivable financing (A/R financing), sometimes known as a ledgered line of credit or invoice financing, is a great solution for breweries that need more funding that is not available from traditional lenders. Many breweries need additional cash flow to support seasonal demands, growth, brewery opportunities, or solve a short-term cash need. Accounts receivable financing provides your brewery with flexible and immediate cash that will give your brewery the opportunity to grow, restructure, take advantage of supplier discounts, hire additional employees, or even to fund payroll. With our accounts receivable financing options, you can access cash without having to give up equity in your company, and it is less restrictive and expensive than equity financing. A/R financing can increase or decrease based on your current breweries size and needs, allows you to gain administrative support to manage your receivables without additional staff, and gives you access to cash when you request it (based on your eligible accounts receivable).
This type of asset-based financing allows breweries to get instant access to working capital without jumping through the hoops or dealing with the lengthy waits associated with getting a bank loan. When a brewery leverages its accounts receivables to boost its cash flow, it also doesn't have to worry about repayment schedules, and instead of focusing on trying to collect bills, it can focus attention on other core aspects of its brewery.
Track Variable Expenses - To accurately project how much your business will spend each month, it's important to take inventory of every element that creates an expense. Some of these variables are fixed and predictable from month to month, while others vary by season or year. Wages, rent and regular expenses are examples of fixed costs. Examples of variable costs include seasonal expenses, such as stocking pre-holiday inventory, and rising utility costs during especially cold or hot months. To create a solid inventory of all of your costs, especially the ones that are easy to forget about, review past years' records. Be sure to go through your expenses, to make sure there aren’t any annual fees that you forget about as they only come once a year.
Leverage Data - Leveraging data isn't just for social media sites, sports teams, and wearable fitness devices. If your brewery is growing, you're probably using data to track customers, identify market opportunities, and monitor market share. But are you using data to analyze your finances? Many breweries aren't. Although the data is available in your accounting software or financial system, few companies take the time to access it and study the numbers. You may think cash flow is only about how much is coming in and how much is going out. But if you dig deeper into your own brewery data, you can create more accurate forecasts, identify upcoming cash gaps, and help spot opportunities and threats long before they appear.
Extend Payables as Long as Possible - In contrast, get the best deal you can on payables. Extend your payables to net 60 or net 90, if you can. Some suppliers charge late fees, however, so make sure you pay on time.
Plan Ahead - While lines of credit are reusable, business loans are lump sum disbursements that fund your business when the need arises. Whether you're funding business growth or tiding yourself over between a management transition, a brewery loan can give you a rapid cash infusion and the flexibility to pay that amount back over a predetermined time frame. Brewery loans can be a good choice when growth is on the horizon and they are a longer-term solution than lines of credit. They can help breweries, brewpubs and taprooms increase production, hire key talent or complete a product that will replenish your cash flow. Bottom line, the worst time to plan a cash infusion is when you need it.
Prioritize Cash Flow Analysis - The more rigorous you are about tracking cash flow, the more empowered you'll be to track dips and spikes in performance. Look for bottlenecks and challenges, problems that should be alleviated sooner rather than later. Cash flow optimization is an initiative that is equal parts logistical and strategic. In addition to making sure that numbers are tracked, focus on how you can make them better.
Managing cash flow is vital for the health of any brewery, and you should look for ways to improve your cash flow while also protecting relationships with your vendors and customers. Creating a smart cash flow forecast can help maximize growth for your brewery, by spotting trouble before it arrives and making sure you always have enough money on hand to keep your brewery growing.
At LVRG, we offer extensive solutions and targeted solutions to help small to mid size brewery owners optimize their cash flow and effectively manage their revenue cycle. Have questions about brewery cash flow? Chances are, we've got answers. Call (855) 998-LVRG or click below.