By Maria Pearman
For the Oregon Beer Growler
Know your numbers. This is a maxim that breweries — or any businesses for that matter — need to stick to if they stand a chance at achieving growth and sustained profitability. Producing a great beer is one thing. Growing a great beer-brewing business is another thing altogether.
Regardless of how many retailers or thirsty customers there are clamoring to fill their fridges with your tasty brew, if the numbers are off the margins will be too. In the beverage industry, margins can either catapult a business to profitability and growth or crush it into debt and submission. What’s more, once a business starts down the slippery slope of inaccurate inventory levels, a host of avoidable and costly issues begin to rear their ugly heads — obsolescence of overstock, shortages of raw materials, delays and shutdowns in the brewing process, loss of entire batches, off-target forecasting and erroneous re-orders.
Not surprisingly, then, how a brewery manages its inventory — from purchasing through production and packaging to sales and shipping — has a major effect on the business as well as the beer. Delays in production can put a dent in customer service targets and a single misstep in the ordering, production or distribution of products to customers can end up costing the business big time. This is why it is very important for breweries to exercise complete control over the flow of inventory.
Old School Won’t Cut It Anymore
When inventory managers rely on outdated, inefficient and inaccurate inventory control practices — think multiple spreadsheets, a small army of web applications, handwritten notes and data submitted from other departments — the business will begin to hemorrhage money.
Trying to accurately track, trace and account for perishable inventory without the right tools to do so will result in cost increases. If an inventory manager uses manual data entry to record the latest hop and barley depletions that are based off “best guess” estimates provided by the brewmaster, there is no way an accurate, real-time appreciation of the inventory can be achieved.
Why Accurate Inventory Matters
Maintaining accurate inventory levels is the secret of successful inventory management. Failing to do so results in a number of outcomes which all — in one way or another — contribute to ramping up expenses and driving down efficiency, productivity and profitability.
The challenge of ensuring inventory levels are accurate is more acute in the case of a brewery. This is because the ingredients are perishable. Not only is there a challenge in terms of ensuring synergy among the working parts in the buying, production and distribution of raw materials; the clock is against you as well. Therefore, it’s essential to know how much is on order and in stock as well as how much needs to be ordered to meet demand and incoming orders.
For instance, if the inventory manager is under the impression that the amount of hops on hand is sufficient when it actually isn’t, forecasting will be off and the next order will come up short. If this happens in a high-demand bracket, or if a large order suddenly comes in, chances are high that demand will be left unfulfilled — leading to lost sales and potentially the loss of a valuable customer. Conversely, if inventory is underestimated, the next order could bring in more hops than needed. This leads to an overstock issue where the hops may go to waste. It’s also worth mentioning that surplus inventory levels unnecessarily tie up cash flow, raise costs (labor and storage) and render the business unable to capitalize on sudden opportunities that may arise.
Apart from the tangible costs inaccurate inventory levels can have on a brewery, the intangible costs of poorly managed inventory can take a toll, too. If your inventory manager is constantly running from the office to the brewery to the warehouse in order to confirm or collect missing data, efficiency takes a nosedive, staff morale plummets and friction between department heads is likely to occur. In short, the sailors on the ship are driven towards desertion or mutiny. Taking stock manually is also unproductive and time-consuming.
The bottom line: If there is no way to integrate all the inventory control mechanisms at play — spreadsheets, accounting software, web apps, written notes — then the inventory manager can’t do his or her job. Losing highly-trained staff can prove to be a major setback.
Cloud-based software-as-a-service (SaaS) inventory management solutions allow for seamless integration between all departments in a brewery. With this type of management platform in place, inventory can be managed in real time, by all important team players, across departments and processes. For example, the brewmaster can input and update production data — how much and what kind of raw material — he or she uses in real time, from an iPad, tablet or even a smartphone. This works for a brewery that makes product at multiple locations, reducing waste and integrating multiple aspects, including accounting, analytics and e-commerce.
The net result is optimized efficiency, productivity and profitability and, of course, the production of high-quality, mouth-watering beer tracked, traced and accounted for down to the very last drop.
Maria Pearman, CPA, is the principal at Radix Accounting, an integrated accounting firm for craft brewers offering bookkeeping, payroll, contract CFO services, tax preparation and tax planning.
By Matthew Diment, CPA
As breweries work to put out a wider variety of beers while increasing production, some questions
should arise: Am I costing these products correctly? Is my inventory valued appropriately? Do I know my margin by product lines? Am I losing money on every bottle sold of my best-selling beer?
There are three main components to the cost of product and inventory - raw materials and packaging, labor, and everything else, which falls under the heading of overhead. Raw materials and packaging are typically the easiest pieces to quantify. There is a standard recipe and the price of malt, hops and any adjuncts is known. Crop prices can impact this, but again it is a known amount and often these crops are locked in for the year at a specified price.
Labor can be a little trickier but is still a fairly easy number to grasp. If the quantity produced over a specified time period and the number of production labor hours is known, it should be a simple equation to figure out the allocation of labor to each batch. However, different beers should probably not have the same labor hours allocated to them. A 90-minute boil will have a higher labor allocation than a 60-minute boil. A cellared beer may have additional labor hours, etc.
The hardest item to account for is overhead. Overhead consists of expenses like utilities, depreciation of production equipment, rent, etc. that need to be allocated into product cost and inventory values. Overhead is typically applied using a standard rate due to fluctuations in costs and the total expense is brought to the correct balance at period end. Similar to labor, not every product line will have the same overhead allocation. For example, any beer in an aging program should probably have a higher level of overhead assigned to it during its cellaring process. To add to the complexity of overhead costing, the IRS has different rules for tax purposes as mandated by code section 263A. This code section dictates that additional general and administrative costs not generally included in inventory for financial purposes must be capitalized into inventory at year end for tax reporting.
So, if you are including the correct amount of raw materials, labor and overhead in inventory and since there is no impact to the total bottom line, why should you care about allocating correctly between product lines? Because it is important to know your profit margin by products. It could be that you are making a large margin on one product but losing money on every bottle sold of another. Without knowing your product costs, you are guessing at your sales price, or just following the pricing of other breweries. This assumes that the other breweries have the exact same costing structure and have gone through the process of understanding their product costs. One or both of these is probably an incorrect assumption.
Consider all of the factors of inventory costing the next time you are valuing your inventory for tax and other reporting purposes and think about whether you know your real margin. You may need to consult with your internal and external financial team to retool your costing structure.
This information was provided by Matthew Diment, of Kernutt Stokes, CPAs and Consultants. Matthew and a team of professionals serve the craft brewing industry.
For questions or more information, contact Matthew at 541.687.1170 or firstname.lastname@example.org.