Managing cash flow during a brewery expansion

While my last article examined funding options for start-up capital, I think it would be appropriate to keep the cash topic going and discuss managing cash flow in times of expansion. Does this sound familiar: Distributors are asking for more beer, new markets are calling on you, and production is bursting at the seams. Congrats, you are ready to expand. You are about to embark on a journey that will push your sanity (and bank account) to the limit. Coordinating build out, negotiating lease terms and equipment deposits are a few of the things to expect all while running the existing brewery. A common problem that occurs during expansion is maintaining daily cash flow.

The cash requirements of an expansion are demanding. One goal of this article is to expose some cash flow bottlenecks that may appear during expansion. The other goal is to offer some tips on getting through the expansion with your head still attached.

What the hell happened to our cash?

Most breweries that decide to expand are doing something right, whether that is delicious beer, great marketing or having supportive distributors. With all this positive energy and momentum, it is safe to say that you are probably operating with a cash reserve. My definition of a cash reserve is: If you did not sell another drop of beer you have enough cash, in the bank, to pay the next three months’ bills. So why is it when you start an expansion, you can expect to struggle making payroll?

Up until the point of expansion, you were in a groove. You could manage cash from from a distance given production cycles. You had a strong idea what the distributors were going to pick up and what retail sales would look like. Growth disrupts the groove. As much as we plan for the expansion and equipment purchases — plans change. This change usually does not factor into your cash flow needs.

Some typical examples of disruptions that change plans: Bank could not close the loan quick enough and you had to pony up 20 percent of the equipment cost from your reserves. Code enforcement determines that this expansion will require a larger water supply hitting you with an impact fee that was not budgeted. Equipment delivery is pushed back 90 days because of labor strikes. These are just a few of the bottlenecks that can occur during expansion.

Ideas to weather the expansion

While there is no perfect way to avoid bottlenecks, here are my five tips on how to minimize them:

Expansion plan — Document an expansion plan of how you would like to see it happen. Include the following: Detailed timeline as to start and end dates; a budget; and a vendor listing (who will perform what). Seek feedback from your advisers, distributors and investors on whether this is a realistic plan. This will act as a rough guide through the process, but remember, plans change.

Financing — You’re 16 to 24 months old, your brewery has spurred many surrounding business to open or flourish and the community loves you. By expansion time, you should have some reliable financials to share with banks to seek traditional financing. Given all the circumstances, a bank should lend you money. If they won’t, contact me, I know many banks lending to qualified breweries. One more heads up: This conversation should begin 16 to 24 months before expansion.

Accounts receivable — Given all your fans and success, your distributor should be the biggest cheerleader for this expansion project. They should be kept up to speed on the progress and they should also offer assistance. One easy way they can assist is to shorten payment terms during this process. Up until now you have been able to survive collecting one to two checks per month from them. Shorter receivable terms during the expansion will get cash into your bank quicker, alleviating the cash flow issue.

Manage profit margins — This is easiest understood with a bike illustration. Your existing brewery operation is the front wheel of a bike and it spins true. The expansion is your back wheel. Don’t let the bumps from the expansion misalign your front wheel. If anything, your front wheel should be operating with precision due to the amount of additional responsibilities the expansion will bring. Don’t lose focus.

Timing — While I understand there is never a perfect time for expansion, timing of the project should be considered. This expansion will bring dust and loud heavy machinery to the brewery. You should have some metric which will reveal the best time of the year for your brewery to host these loud guests. You wouldn’t want to disrupt the holiday season gatherings at the brewery, nor would you want to miss out on the highest sales months. Examine your data and pick the least painful time.

Be sure to read all of Chris Farmand’s insightful features

Chris Farmand is the founder of Small Batch Standard, a CPA firm helping craft breweries across North America. Chris has more than 10 years of tax and accounting experience, with the last 3 years dedicated to the craft brewing industry. Small Batch Standard believes brewery owners should have reliable financials while focusing on what they do best, making beer. He can be reached at [email protected].