Last week I started by showing how the money that comes into your brewery should be divided into categories according to what you sell. Category examples are; sales of food, beer, wine, etc. Now, I want to show you how you can control your money as it goes out. Your control of your cash in-flow and out-flow begins with the absolutely most important thing you can do - inventory management.
With the exception of labor, the cost of the products you sell may be your biggest expense. We call this Cost of Sales, because remember, we are only selling food, beer, wine and perhaps a few other things such as tee shirts or hats. We do not need to look at our other expenses like rent, utilities, repair and maintenance and the like in this calculation. These expenses do not relate to our inventory. So managing Cost of Sales is our highest priority behind actual sales.
If you are calculating what you need to break even on an 8% beer cost of sales (ingredients cost .08 per dollar sold) and you sell $400,000 worth of beer a year, then if your numbers are off by even 3%, you lost $12,000 for the year. The best way to make sure your numbers stay in line is to do a monthly inventory.
To do an inventory you simply count what you have on hand at the end of the month. For beer that would be grain, hops, yeast, and finished product, whether in kegs, cans, or tanks. I don’t count chemicals, taxes, or labor into my inventories. Just the raw ingredients to make the products.
If you take each item and multiply it against what you paid for it, you get the value of that one product. For example if you have 857 pounds of 2-row malt and it cost you .38 per pound, you have 325.66 worth of 2-row (857 times .38). The same goes for 40L, or Munich 10L and so on. For finished product, I come up with an average of what a keg would cost, or a barrel of beer. I use something like $22.50 for a keg, which covers just the cost of the product. If a keg feels half full then I count it at .5. If it feels “almost” full I might count it as .8. You could also weigh the partial kegs to be more accurate. But, if the same person is doing the inventory every month, then these estimates will average out into a representative number.
There are other numbers you need to know to make this work. The first is your beginning inventory, or what you have on hand at the beginning of the month. This is easy because your beginning inventory and last month’s ending inventory are the same.
You also need to know what you spent on the inventory you bought during the month. This is also easy because in quickbooks (or whatever accounting software you use) when you pay a company for something, you have to assign what you bought to an account. If you buy yeast from White Labs, then that account is Beer Cost of Sales. The same goes for malt from Great Western or Briess or whoever your suppliers are. Quickbooks will addd up and tell you how much you spent on Beer Cost of Sales. This is the number you need for Purchases.
Your ending inventory, or what you have at the end of the month is calculated on the spread sheet you used to take your inventory.
The last piece of the equation is sales. Quickbooks will also give you this figure, which is the total sales in that category - Beer - for the month.
The formula for calculating Cost of sales is this: Beginning Inventory plus Purchases, minus Ending inventory, divided by Sales, equals Cost of Sales as a percent of those sales.
Does this seem complicated? It’s not. You take 30 minutes at the end of the month and write down what you have on hand. Then you sit at your computer and input the numbers into the spreadsheet. The spreadsheet calculates this and spits out your magic number.
You do this every month because it will tell you if you have a problem or not. That problem will show up in the form of a higher Cost of Sales %. This can be from bartenders stealing by not ringing up sales, or giving away product, or simply the cost of grain or hops goes up and you don’t adjust your prices accordingly. You need this information to stay on top of it.
Now you may feel you don’t need to do all this because your place is packed every night and “damn it!”, you don’t have time for all that book work. Don’t be a loser! Yes you may be making money, but how much are you losing because you don’t track this most important aspect of your profit and loss statement. Besides, how many successful breweries that you respect do business by not performing these basic business practices? I would bet none.
I am happy to share a beer inventory spreadsheet. Just email me - firstname.lastname@example.org and I will send you one. You can rework it for your beer inventory or change it to turn it into a food inventory, or merchandise, wine, whatever.
I would also like to take this opportunity to thank my brilliant wife Sandy for proofreading these newsletters and not letting them get out with my bad grammar and bad habit of ending sentences with prepositions!
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