What's your major?

I don’t know if you can tell, but I haven’t been making a post every week. Why? I think I’ve already covered everything I can offer. Oh, I could go off on a tangent and tell you about the olden times when you could brew mediocre beer and customers would line up, but that’s not going to help anybody. And helping is what I want to do.

So I got a question from a future brewery owner who is in school, and he asked me, “given a choice, would it be better to concentrate on marketing or accounting?” I like questions, so please keep them coming!

I think marketing is so important, but it doesn’t hold a candle to accounting. A brewery is a business first and foremost. And, if you own a business you should have a full understanding of the beans in and beans out if you want to survive. Don’t get me wrong: you still need to market your brewery, but there are a ton of videos and books on the subject. But accounting is so much more involved.

It’s not just Sales minus Expenses equals Net Profit. There are other factors. For example you can have a healthy bottom line on your profit and loss statement and still not have any money in the bank. That could be because that cash is tied up in too much inventory. You see, inventory is not an expense. It’s an asset, and you just changed the asset from cash to grain or hops, for example. It doesn’t affect your bottom line. Confused?

How about this? Let’s say your bank loan payment is $5,000 per month. It is divided between interest and principal: $2,500 interest and $2,500 principal to make it easy. So you write a check for your loan payment of $5,000. It would make sense maybe that now your net profit is $5,000 less. Nope. Your net profit is $2,500 less. That’s because you can only deduct as an expense the interest on the loan. Because the principal was never your money in the first place. You just borrowed it and are now paying it back.

This creates a unique problem. You thought your net profit was going to be $10,000, when in fact your profit and loss statement is going to say it’s $12,500. That’s because you couldn’t expense out the principal payment you paid back. This is called “Phantom Income”. Your profit and loss statement doesn’t reflect principal. This could bite you at the end of the year, because you will be paying taxes on money you don’t have.

When we finish a month at Colorado Boy, we reconcile our books and produce a profit and loss statement. It’s very valuable so you can compare sales and expenses this year to last. But as an owner you will want to run another report that will help you understand the health of your brewery. This is called a Statement of Cash Flows. This report shows you all the cash you brought in and all that went out in the month, regardless of the things I mentioned above.

This really just scratches the surface. If you had a chance in school to study accounting you are ahead of the game. If not, do profit and loss meetings with an accountant. They will explain all of this as it relates to your business, and over time you will learn.

So yeah, if you are working on a project and you have a question, drop me a line and I’ll answer you right away and also in one of these articles. I enjoy it.