According to the Brewers Association, hundreds of breweries shutter their doors each year. Why? What is the primary reason for their failure?
Most importantly, how can you avoid a similar fate? Bart Watson, the chief economist of the BA, stated that brewery closures are partly attributed to increased competition, rental costs, and issues with landlords. However, the truth is that there could be countless reasons behind these failures.
Nevertheless, the number one cause for craft breweries going under is running out of cash. Cash is king. It serves as the fuel that keeps businesses running smoothly. Once the cash runs dry, it’s game over. So, how can one avoid this situation? The first step is to focus on five key drivers that impact cash flow.
Five Drivers of Brewery Cash Flow
In the beer industry, there are five areas that significantly affect cash flow. One must not neglect any of them to mitigate risks.
Accounts receivable refers to the money that customers (wholesalers, retail accounts, etc.) owe you. It represents outstanding cash. When sales increase, so do accounts receivable. This can be a surprising dilemma for growing breweries – sales go up, but the collection of cash lags behind.
Inventory includes raw materials (such as hops and malt), packaging materials, and finished goods. Similarly, as sales rise, so does inventory. Inventory represents cash held either at the brewery or in an offsite warehouse. Purchasing inventory requires cash payments, which means more money flowing out.
Accounts payable refers to the money owed to suppliers. Extending payment terms allows you to hold onto cash for longer periods. No one wants to default on their bills, but paying early can be detrimental to your bank account.
Capex refers to investments made in brewery equipment, tanks, and kegs. Even if you borrow money to purchase these items, you will still need to contribute a certain amount in cash (usually around 20% to 30% of the purchase price). Additionally, don’t forget that you have to repay the borrowed money with interest, further impacting your cash flow.
Operating performance, also known as profit or loss, is the discrepancy between revenue and expenses. Profit or loss is calculated by deducting expenses from revenue. While it is possible to show profits over a certain period while running out of cash, it is also possible to accumulate cash even during times of losses. This may seem paradoxical, but it is a mathematical reality. However, over an extended period, profitability is vital to avoid running out of cash. But, you are likely already aware of that.
The primary reason why breweries close their doors is due to a lack of cash. If you want to steer clear of a similar fate, diligently track these five cash flow drivers on a monthly basis and keep a watchful eye on your cash reserves.
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