Latest / Cash Flow Conversations with Fexingo: Working Capital, Receivables, and Small Business Finance / How a Brewery Used Batch Costing to Fix Cash Flow
Transcript
- Lucas: So Luna, we've talked a lot about forecasting and payment plans, but today I want to get into something that trips up a lot of product-based businesses: knowing what one unit of your product actually costs to make. Luna: You mean like, the real cost, not just ingredients? Lucas: Exactly. And the story I want to tell is about a craft brewery that was profitable on paper but constantly starved for cash. I spoke with the founder, and he agreed to let me share the numbers, though I'll keep the name out of it. Lucas: The brewery was doing about two million dollars a year in revenue. They had a flagship IPA, a seasonal stout, and a rotating series of small-batch experiments. On paper, gross margins looked healthy—around 55 percent overall. But the bank account kept dipping into overdraft. Luna: Classic. Revenue is vanity, cash is sanity. Lucas: Right. So we started digging into their batch-level costs. They had never really allocated overhead to individual batches. They just lumped everything into one big pot. But when we broke it down, we found that their flagship IPA—the one that made up 60 percent of sales—had an actual cost per batch that was 20 percent higher than they thought. Luna: Because of the hops? I've heard hop prices have been volatile. Lucas: Partly. But it was more than that. They were using a lot of whole-leaf hops for dry hopping, which are pricey, and they were also over-specifying the grain bill—using more malt than the recipe really needed. The bigger issue though was labor and overhead. They were allocating those costs based on revenue, not on time spent. So the small-batch experiments looked expensive, and the IPA looked cheap, when actually the opposite was true. Luna: So the popular beer was subsidizing the experimental ones? Lucas: Exactly. And because they thought the IPA was cheap to make, they priced it aggressively, and they promoted it heavily. Every pint they sold actually lost money once you accounted for the true cost of ingredients, labor, and the tank time it took up. Lucas: The fix wasn't glamorous. They started doing batch costing properly. For each batch, they tracked the exact quantity and price of every ingredient, the hours of labor actually spent on it, and they allocated overhead—rent, utilities, equipment depreciation—based on the number of hours the batch occupied a fermenter. That last part was the real eye-opener. Luna: Because the stouts sit in the tank longer? Lucas: Yeah. The stout was in the fermenter for six weeks, while the IPA only took three. So the stout was tying up capital and tank capacity for twice as long. When they allocated overhead that way, the stout's true cost went up another 8 percent. And the IPA, with its fast turnaround, actually absorbed less overhead than they thought. Lucas: So after a few months of tracking this, they had real numbers. And they made three changes. First, they cut the grain bill on the IPA back to the original recipe spec, which saved about 12 percent on ingredients without changing the flavor profile, according to their blind taste tests. Luna: That's a bold claim, but if the customers can't tell the difference, why not? Lucas: Second, they raised the price of the experimental batches by 15 percent, and they cut the volume on those—they stopped brewing them as often. And third, they renegotiated with their malt supplier based on the actual volume they were committing to on the core brands. Lucas: The result? Within two quarters, their gross margin on the IPA went from what they thought was 58 percent to a real 62 percent. And because they were using less capital per batch, their cash conversion cycle shortened by about 18 days. That's significant when you're running on a thin line of credit. Luna: That's a great example. But I imagine batch costing isn't just for breweries. Any business that makes something in batches—food, cosmetics, even software with fixed costs per project—could use the same approach. Lucas: Absolutely. The core idea is to allocate costs based on what actually drives them, not just a percentage of revenue. That's the difference between knowing your margins and guessing them. Luna: And that's the kind of thing that keeps a business from running out of cash even when the income statement says you're profitable. Lucas: Exactly. And look, this is a good moment to mention something that keeps conversations like this coming to you every day. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's what funds the whole network—no ads, no sponsors, just that small group keeping it going. If these episodes have helped you think about your numbers differently, you know where to find us. Luna: Yeah, it's a pretty lean model, and we're grateful for every one of them. Lucas: So back to the brewery. The real lesson here isn't just about tracking costs—it's about tying that data back to cash flow. They now run a rolling 13-week cash flow forecast that's updated with actual batch costs as each batch is closed out. So if a batch comes in over budget, they see the impact on cash three weeks before it hits the bank. Luna: That's the kind of foresight that buys you time to adjust—maybe push a payment, delay a purchase, or offer a discount to move inventory. Lucas: Right. And they also set up a simple rule: no new experimental batch gets brewed until they can show it will at least break even on a fully loaded cost basis. That's stopped a few pet projects that would have been cash sinks. Luna: So what about the pricing side? They raised prices on the experimental stuff—did they see any pushback from customers? Lucas: Surprisingly little. The people who buy those limited releases are usually more interested in the story and the novelty than the price. They actually saw sales volume stay flat, and the higher price added about 3 percent to overall revenue—pure margin, effectively. Lucas: The whole exercise took about two months to implement properly. The founder told me the hardest part was getting the staff to track their time accurately. But once they saw the numbers leading to better decisions—like not brewing a batch that would lose money—they bought in. Luna: It's pretty validating when you can show a brewer that his time on a batch is actually worth something. Lucas: Exactly. And that's the takeaway for any small business owner listening: if you don't know your true unit cost, you're flying blind. Take a weekend, map out the real costs for your top three products or services, and see if what you think is profitable actually is. Luna: And if you find a surprise, you've got something to act on. That's the first step to fixing your cash flow.