Latest / Craft Brewery Financial Training Podcast / 7 Financial Red Flags That Predict Brewery Trouble

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7 Financial Red Flags That Predict Brewery Trouble · Craft Brewery Financial Training Podcast

• 0:00
  Kary Shumway: Today on the podcast, I'm sharing the audio version of a recent presentation on brewery financial red flags and turnarounds, how you can spot financial trouble early and fix it before it is too late.
• 0:11
  Kary Shumway: So we get into seven financial red flags that predict brewery trouble, how you can diagnose the root cause of these problems.
• 0:18
  Kary Shumway: We talk about the stabilized first turnaround framework, and I'll share high-impact fixes that restore cash flow fast.
• 0:26
  Kary Shumway: And we'll wrap up with how you can build a financial early warning system to identify those red flags and fix them before they become big trouble.
• 0:36
  Kary Shumway: So for now, please enjoy the audio version of our recent presentation on brewery financial red flags and turnarounds.
• 0:44
  Kary Shumway: Welcome to the Craft Brewery Financial Training Podcast, where we combine beer and numbers to provide you with tips, tactics, and strategies so that you can improve financial results in your brewery.
• 0:54
  Kary Shumway: I'm your host, Kerry Shemoy, a CPA, CFO for a brewery, and a former CFO for a beer distributor.
• 1:01
  Kary Shumway: I've spent the last 20 years using finance to improve financial results in our beer business.
• 1:06
  Kary Shumway: Now I'm helping other craft breweries to do the same.
• 1:09
  Kary Shumway: Are you ready to take your brewery financial results to the next level?
• 1:13
  Kary Shumway: Okay, let's get started.
• 1:19
  Kary Shumway: Just a quick note, we'll be right back to the podcast.
• 1:22
  Kary Shumway: I want to let you know about a new network for beer industry professionals.
• 1:26
  Kary Shumway: It's called the Beer Business Finance Association.
• 1:29
  Kary Shumway: It's an organization of financial pros, just like you, looking to improve financial results, increase profitability, connect with your peers, and share best practices.
• 1:40
  Kary Shumway: So I'd love to tell you a little bit more about this.
• 1:43
  Kary Shumway: If you are interested in learning more, please email me, Carrie at Beer Business Finance.com.
• 1:48
  Kary Shumway: That's K A R Y at Beer Business Finance.com, or you can visit BBFassociation.org.
• 1:56
  Kary Shumway: That's BBFassociation.org to learn more.
• 2:00
  Kary Shumway: Welcome to our presentation on brewery financial red flags and turnarounds.
• 2:05
  Kary Shumway: I'm Carrie Shumloy, founder of Craft Brewery Financial Training, the Beer Business Finance Association.
• 2:11
  Kary Shumway: And in this presentation, I'm going to share some tips, tactics, strategies, approaches you can take to spot trouble in your financials early on so that you can fix it.
• 2:23
  Kary Shumway: Our financial statements are historical.
• 2:26
  Kary Shumway: They're backwards looking.
• 2:27
  Kary Shumway: So when we get these reports, it's showing us like what already happened.
• 2:31
  Kary Shumway: And a lot of times it is too late to fix that because we're getting our financials, you know, two or three weeks after the month ends.
• 2:39
  Kary Shumway: So really the goal is how do we take that information?
• 2:42
  Kary Shumway: We we do need those financials to tell us all right what happened and what's likely to occur into the future, but how do we forward forecast?
• 2:49
  Kary Shumway: How do we build early warning systems into our financial process so that we're constantly being uh vigilant and looking out for potential red flags?
• 3:01
  Kary Shumway: So I'm going to share with you the seven financial red flags that can predict brewery trouble, really, what tools that you can use to watch out for these, how you can diagnose root cause, not just the symptom, because a lot of times we'll we'll figure out, oh, what's going on, but it just keeps repeating unless we're going to put a new process or system in place to fix it.
• 3:24
  Kary Shumway: We'll talk about the stabilize first turnaround framework, how do you get on good, solid footing so that you can step forward and into the financial promised land?
• 3:36
  Kary Shumway: We'll talk about high-impact fixes that can restore cash flow fast, and then how do you build that early financial warning system?
• 3:45
  Kary Shumway: If you're in Massachusetts, I did want to let you know about the Massachusetts Workforce Training Fund.
• 3:51
  Kary Shumway: So if you scan this QR code, it will take you to a landing page where you can watch a couple of short videos that show what courses are available and how you can determine if you're eligible.
• 4:02
  Kary Shumway: In a nutshell, eligible Massachusetts breweries may receive up to 50% 50 to 100% reimbursement for the training through the Express program.
• 4:12
  Kary Shumway: So it can be a great way to really kickstart the year on your financial training programs.
• 4:19
  Kary Shumway: So if you want to learn more about that, you can go ahead and scan the QR code.
• 4:23
  Kary Shumway: Alternatively, you can just jump on a call with me, um, Carrie at beerbusinessfinance.com, K A R Y at BeerBusinessfinance.com, and I can walk you through the process.
• 4:33
  Kary Shumway: It just takes five or ten minutes to get you signed up and make sure you're eligible, and then you can see what the courses are.
• 4:39
  Kary Shumway: And it's not just financial training, I do have a couple of courses on there now, but there's literally hundreds of training courses that may be beneficial for your business.
• 4:50
  Kary Shumway: So let's define the problem.
• 4:52
  Kary Shumway: So fundamentally, financial trouble is invisible until it's urgent.
• 4:57
  Kary Shumway: You know, we we're we're very busy running our breweries, and sometimes we don't take the time to kind of stop, see what's going on.
• 5:05
  Kary Shumway: So this doesn't happen overnight, doesn't happen suddenly.
• 5:08
  Kary Shumway: You know, it really does happen over time.
• 5:11
  Kary Shumway: And the warning signs are there.
• 5:13
  Kary Shumway: We're just not necessarily always knowing where to look.
• 5:17
  Kary Shumway: Um and again, we're pretty busy putting out fires and you know, taking care of customers and brewing beer, and meanwhile, the numbers are just kind of sitting there waiting for us to analyze them.
• 5:28
  Kary Shumway: And as I mentioned, the financial reports that we get, you know, income statement, balance sheet statement, and cash flows are backward looking, and we do review them generally weeks after the month ends, so it's a little it's too late to do anything about that.
• 5:40
  Kary Shumway: It is difficult to know which numbers actually make a difference.
• 5:44
  Kary Shumway: Um, so I know how that feels.
• 5:46
  Kary Shumway: Like sometimes we're looking at all the data and we have so much of it uh that everything can feel important, uh, but then we get overwhelmed and and nothing gets acted on.
• 5:55
  Kary Shumway: So we need a system to really distill this down.
• 5:57
  Kary Shumway: Like what is actually the most important number to look at?
• 6:00
  Kary Shumway: What are the levers that I can pull to improve these?
• 6:04
  Kary Shumway: And what kind of early warning system can we put in place so that we can identify these problems before we have those cash problems?
• 6:11
  Kary Shumway: Because that that's when we really know it's a problem, right?
• 6:14
  Kary Shumway: It's like, oh, I can't make payroll, I can't make this, I can't pay this vendor bill, or I can see the cash in the count is draining.
• 6:21
  Kary Shumway: You know, that's by then it's too late.
• 6:23
  Kary Shumway: So we want these early warning systems to tell us what's going on, what are the key ratios, the metrics, the financial what what should we be looking at?
• 6:33
  Kary Shumway: And again, what system, what sort of early warning system can we put in place to make sure we don't wind up in that situation?
• 6:41
  Kary Shumway: So the solution is here is to really shift from just looking at the financials to really analyzing and monitoring these financial signals.
• 6:51
  Kary Shumway: What are they telling us?
• 6:52
  Kary Shumway: To shift from maybe dozens of reports or dozens of pages of data to a r a really focused dashboard, a red flag dashboard, if you will.
• 7:03
  Kary Shumway: We want to obviously try to move from reactive uh to responsive.
• 7:08
  Kary Shumway: And just to say it, it's not trying to make you guys an accountant or a CPA, but it's really knowing where to look, what numbers are important, how often should you do it, and ultimately what action should you take when something looks kind of out of whack.
• 7:25
  Kary Shumway: So here's our game plan.
• 7:26
  Kary Shumway: We want to identify these financial red flags quickly, turn them into action items, stabilize our brewery before we optimize it, and then review those financial signals on a regular uh weekly cadence.
• 7:43
  Kary Shumway: So here are seven financial red flags to help us spot trouble early.
• 7:49
  Kary Shumway: So the first is, and I'm gonna show you each of these uh reports in sort of an example, some spreadsheets, things like that.
• 7:56
  Kary Shumway: But the first red flag is looking at our historical financial statements and seeing what's going on.
• 8:02
  Kary Shumway: Do we have a decline in net operating income?
• 8:05
  Kary Shumway: Uh I find it super helpful to do this because it's kind of a 30,000-foot view to begin.
• 8:10
  Kary Shumway: So we're gonna look back in time, we're gonna look at our financial metrics, and we're gonna see kind of what happened.
• 8:17
  Kary Shumway: Where were we?
• 8:18
  Kary Shumway: How did we get to where we are today?
• 8:20
  Kary Shumway: The second red flag is looking at our negative or shrinking cash flow.
• 8:26
  Kary Shumway: Now, typically, the way many breweries will manage cash flows just is just be mindful of let's look at the bank, you know, jump online, how's cash looking?
• 8:35
  Kary Shumway: Maybe we do a quick assessment as what we have coming up, payroll and any big bills.
• 8:40
  Kary Shumway: But we really need a better, more forward-looking, uh deeper analysis of what's actually happening in cash flow.
• 8:48
  Kary Shumway: Uh, because we know it's happening, right?
• 8:50
  Kary Shumway: I mean, money's coming in, money's going out.
• 8:52
  Kary Shumway: We're pretty sure, hopeful at the end of the day, that there's gonna be more left over, but we don't really have great tools, so we'll talk about what tools you can use for that.
• 9:02
  Kary Shumway: Uh, the third red flag, cash flow ratios are missing our target.
• 9:06
  Kary Shumway: So we're gonna start with looking at a cash flow statement, kind of what it's telling us.
• 9:10
  Kary Shumway: And then we're gonna break this into really tangible, approachable cash flow ratios that you can look at on a regular basis.
• 9:19
  Kary Shumway: What are these ratios?
• 9:20
  Kary Shumway: How do they work?
• 9:20
  Kary Shumway: Again, what levers could you pull to improve them?
• 9:24
  Kary Shumway: The fourth red flag, sales decline, margin erosion.
• 9:29
  Kary Shumway: You know, this is the one I think we feel most profoundly these days when sales are tough to come by.
• 9:35
  Kary Shumway: So we're flat or we're down a little, we're if we're if we're up, we feel great.
• 9:39
  Kary Shumway: But what's happening to those margins?
• 9:41
  Kary Shumway: Sometimes those really take a hit.
• 9:44
  Kary Shumway: And the fifth red flag and really can sort of be a trouble spot for your margins, are if you're selling at wholesale, those margins dipping below benchmarks.
• 9:57
  Kary Shumway: And what are the benchmarks?
• 9:59
  Kary Shumway: Where should where should you be at?
• 10:00
  Kary Shumway: How are you measuring it now?
• 10:02
  Kary Shumway: Do you really have the full handle on your cost of goods sold?
• 10:06
  Kary Shumway: So we'll dig into that.
• 10:07
  Kary Shumway: The sixth red flag, failing a financial health checkup.
• 10:11
  Kary Shumway: So I'm going to show you a handful of ratios that are going to kind of give you some insights into the overall financial health of your business.
• 10:19
  Kary Shumway: And they're relatively easy to calculate and keep an eye on, and they can be a good early warning system to just make sure, all right, we're running into trouble here, or we look pretty good, uh, or this area looks fine, but this area we've we've got some red flags.
• 10:33
  Kary Shumway: And the seventh area we'll look at are these key retail ratios if they're getting off target.
• 10:40
  Kary Shumway: Generally speaking, our tap rooms, our retail customer-facing locations are the most profitable, highest margins, best profitability, but sometimes even those can start to veer off.
• 10:52
  Kary Shumway: So we want to watch some ratios to make sure that we are maximizing our margins and profitability.
• 11:00
  Kary Shumway: So the first red flag here is to watch for declines in your net operating income.
• 11:07
  Kary Shumway: So there's different terms for this.
• 11:08
  Kary Shumway: You could say profit, bottom line.
• 11:10
  Kary Shumway: I use just net operating income here in place of you know just saying profitability.
• 11:18
  Kary Shumway: So what I'm gonna do here is run a historical kind of look back at the at the years that we've been in business.
• 11:24
  Kary Shumway: So let's just say you've been in business for three years, you know, year one, year two, and this is currently year three, and I want to run just a very summarized income statement.
• 11:34
  Kary Shumway: So sales and cost of goods, margins, operating expenses, and net income.
• 11:38
  Kary Shumway: Just five lines on here.
• 11:40
  Kary Shumway: Very simple.
• 11:41
  Kary Shumway: I think this is an important point to underscore is if it's simple, we're actually going to look at it.
• 11:48
  Kary Shumway: We might we have a fighting chance to understand what it's telling us.
• 11:52
  Kary Shumway: Whereas, you know, an income statement that's two or three or four pages, and it's hard to tell what numbers are really important because we can kind of get lost in the details.
• 12:01
  Kary Shumway: So I would encourage you to just run a summarized look at this.
• 12:04
  Kary Shumway: You can always run the details after, but start this way.
• 12:08
  Kary Shumway: So that's step one.
• 12:09
  Kary Shumway: Summarize it, and then let's look back, say three years.
• 12:12
  Kary Shumway: I tend to run between three and five years, depending on how long you've been in business, but it gives you kind of a nice look.
• 12:19
  Kary Shumway: It shows you some trends.
• 12:20
  Kary Shumway: So we can just see our top line sales are growing.
• 12:24
  Kary Shumway: 525 in year one, 675, 7%.
• 12:27
  Kary Shumway: So we're like, all right, that's good.
• 12:29
  Kary Shumway: And then we look at our margins, and I look to look, the dollars can kind of be hard to okay.
• 12:35
  Kary Shumway: The margins are up, they're down.
• 12:36
  Kary Shumway: I like to look at those, but I start with the margin percentage.
• 12:38
  Kary Shumway: Like, what's it doing?
• 12:39
  Kary Shumway: Is it the same?
• 12:40
  Kary Shumway: Is it flat?
• 12:41
  Kary Shumway: Is it going down?
• 12:42
  Kary Shumway: So in this case, year one margins were 75%, then they dipped down to 60% in year two, and then 49% in year three.
• 12:49
  Kary Shumway: So we're like, all right, well, what's going on?
• 12:52
  Kary Shumway: Now, if you're looking at this, you're thinking, well, what is going on?
• 12:56
  Kary Shumway: Maybe this brewery decided to go heavy into wholesale.
• 13:01
  Kary Shumway: So we started out as a just a tap room with maybe a little bit of wholesale, and then we we went headlong into it, and we did get the sales volume.
• 13:08
  Kary Shumway: Sales have grown quite a bit, uh, but margins have eroded.
• 13:12
  Kary Shumway: And then I look and I say, wow, let's look at the dollars.
• 13:14
  Kary Shumway: So gross margin in year one was$393,000, gross margin in year three, even having grown sales,$200,000 uh is only$350,000.
• 13:23
  Kary Shumway: We actually lost margin.
• 13:24
  Kary Shumway: We lost a lot of margin percent, we lost margin dollars.
• 13:27
  Kary Shumway: That's that's a red flag for sure.
• 13:31
  Kary Shumway: And then we look at the operating expenses, what's going on there?
• 13:34
  Kary Shumway: Now, as a percentage of sales, they're fairly static.
• 13:38
  Kary Shumway: 60% operating expense in year one as a percentage of sales, and then 63% and 61%.
• 13:43
  Kary Shumway: So the percentages don't worry you, but then you look at the dollars and you're like, all right, we had operating expenses in year one of$315,000.
• 13:51
  Kary Shumway: Then it went up to$425,000 that's$100,000, then it went up to$442.
• 13:56
  Kary Shumway: So our operating expenses have gone up over$100,000 while our margin has shrunk about$35,000 or$40,000.
• 14:04
  Kary Shumway: So that something's going the wrong way here.
• 14:07
  Kary Shumway: Now, as I'm saying this, you might be thinking, well, this is kind of obvious.
• 14:10
  Kary Shumway: I mean, you'd know this right away, but a lot of times we run this and we forget.
• 14:15
  Kary Shumway: You know, we forget what we did two or three years ago.
• 14:18
  Kary Shumway: Uh, and we're not always looking at the trends or, you know, kind of the slide if you sort of feel it.
• 14:23
  Kary Shumway: We're like, God, you know, cash is tough, but sales are growing, so I feel good about this, and we can fool ourselves.
• 14:28
  Kary Shumway: And then we look at the net income, and we can see in year one, not a bad business.
• 14:33
  Kary Shumway: You know, we had a 15% profit to the bottom line, making$78,000 of net income.
• 14:39
  Kary Shumway: Looks good.
• 14:40
  Kary Shumway: Year two, boy, it really changed.
• 14:42
  Kary Shumway: We went down to loss of 20, negative 3%, and then in year three, really start to decline, minus 87,000 loss, minus 12% is a percentage of sales.
• 14:53
  Kary Shumway: So, what does this tell us?
• 14:55
  Kary Shumway: It tells us kind of the you know, the things that we maybe felt in our gut anyway, that while sales are going up, margins are going down, expenses are going up, and that bottom line is taking a hit.
• 15:07
  Kary Shumway: So, this can just kind of show us where we need to focus.
• 15:12
  Kary Shumway: So, that's red flag number one.
• 15:13
  Kary Shumway: It's are you seeing a decline in your net operating income?
• 15:17
  Kary Shumway: You can run very quickly in QuickBooks if you're using that, just go in there, run a custom setting, grab the last three years, run it in a summarized way.
• 15:29
  Kary Shumway: I usually dump it to Excel just so I can, because QuickBooks doesn't always have these like show me the gross margin percentage, show me the net income percentage.
• 15:37
  Kary Shumway: Uh so the spreadsheet can be helpful for that.
• 15:39
  Kary Shumway: But I find this super helpful just in terms of I think again, setting the context, like what's happened in our business, right?
• 15:47
  Kary Shumway: Where where were we two, three, four, five years ago?
• 15:49
  Kary Shumway: Where are we now?
• 15:50
  Kary Shumway: How do we get here?
• 15:52
  Kary Shumway: And interestingly, if we're not in a place we want to be right now financially, when when was a time that we were in a good place?
• 16:00
  Kary Shumway: And what can I do to get back to that?
• 16:02
  Kary Shumway: So if we look at year one, we're like, boy, times were pretty good back then.
• 16:06
  Kary Shumway: How do we get back to that?
• 16:07
  Kary Shumway: How do we, well, we just maybe reverse engineer it, or we think about, you know, strategically, how are we running our business now and what's changed, and what do we need to change back to?
• 16:19
  Kary Shumway: So that's the first red flag decline in net operating income.
• 16:23
  Kary Shumway: The second is negative cash flow.
• 16:26
  Kary Shumway: Now, of the three financial statements, the cash flow statement probably gets the least amount of attention.
• 16:33
  Kary Shumway: Um, because I think a lot of times, even though it sounds like a cool report, we run it and we're like, I have no idea what this is telling me.
• 16:41
  Kary Shumway: Um so what we want to look at here, there's different forms and formats of cash flow statements.
• 16:49
  Kary Shumway: We have the direct method, we have the indirect method, we have the reports QuickBooks can run or can't run.
• 16:55
  Kary Shumway: Uh, but ultimately, this method here is showing us whether our business is producing enough cash flows to sustain itself.
• 17:06
  Kary Shumway: So this cash flow statement breaks it into operating activities, investing activities, and financing activities.
• 17:12
  Kary Shumway: Now, operating activities basically means what are the cash flows from your core operations?
• 17:18
  Kary Shumway: You know, we make beer, we sell beer, are we making money doing this?
• 17:23
  Kary Shumway: Investing activities are going to be things that we're literally investing in the business.
• 17:28
  Kary Shumway: Are we buying new equipment?
• 17:29
  Kary Shumway: Are we updating the taproom?
• 17:31
  Kary Shumway: Are we selling old equipment?
• 17:33
  Kary Shumway: So these are sort of, you know, again, investments in uh financing activities, or how where are we getting the money to say make those investments?
• 17:43
  Kary Shumway: Where is that coming from?
• 17:44
  Kary Shumway: So it might be coming from a new loan, loan proceeds, owner investment, um, things of that nature.
• 17:50
  Kary Shumway: And then where is the money going relative to those financing activities?
• 17:54
  Kary Shumway: Loan payment, uh loan principal payments, for example, or maybe there's an owner draw, uh, distributions to owner.
• 18:02
  Kary Shumway: So those are financing activities.
• 18:03
  Kary Shumway: So when you when you run these cash flow reports, we want to start by focusing on the operating activities and whether we have a net operating uh cash flow or deficit.
• 18:14
  Kary Shumway: So in this example, we're simply adding up cash from beer sales, payment to suppliers, payment to payroll, and so forth, and trying to determine do we have a positive cash flow from our core operations?
• 18:27
  Kary Shumway: And in this case, the answer is no.
• 18:29
  Kary Shumway: So then you're like, well, how come we didn't run out of cash?
• 18:32
  Kary Shumway: It's well, we borrowed, it looks like we borrowed money.
• 18:34
  Kary Shumway: That's where financing activity says, yeah, the owner put in 10 grand and we we took a new loan of 50 grand.
• 18:40
  Kary Shumway: Now we did buy some tanks and whatnot, but that's why we're cash positive, at least at this point.
• 18:46
  Kary Shumway: Because again, we'll typically look at you know cash over the course of time, and if it goes up, we feel good.
• 18:52
  Kary Shumway: If it goes down, we get worried.
• 18:53
  Kary Shumway: You know, in this case, beginning cash of 20 grand, ending cash of 32, cash went up.
• 18:59
  Kary Shumway: So our instinct might be, well, cash is up, I guess we're okay.
• 19:03
  Kary Shumway: But then when you break it down like this, you can say, hmm, this isn't sustainable.
• 19:07
  Kary Shumway: You know, we've got a net operating cash deficit, and you can see where it's coming from.
• 19:12
  Kary Shumway: So, red flag number two, negative cash flow, in particular, negative operating cash flow.
• 19:19
  Kary Shumway: So I'd encourage you to figure out how to run a cash flow report as part of your monthly reporting.
• 19:55
  Kary Shumway: You know, we re-review the income statement, hopefully we review the balance sheet, um, and adding in this cash flow component uh so that you can really spot these red flags early.
• 20:07
  Kary Shumway: Next, number three for red flags is setting up a scorecard for your cash flow ratios.
• 20:14
  Kary Shumway: Now, there's lots of different ratios we could look at.
• 20:17
  Kary Shumway: I'll focus on maybe three or four here.
• 20:20
  Kary Shumway: Um we typically look at the five or six cash flow drivers, accounts receivable, and inventory accounts payable, uh, loan payments, net operating income, capital expenditures.
• 20:33
  Kary Shumway: Those those typically get you most of the way there.
• 20:35
  Kary Shumway: So if you're gonna set this up, you you start by saying, like, what are the most um material uh cash flow items that you have?
• 20:45
  Kary Shumway: So for example, accounts receivable, you might not have accounts receivable.
• 20:48
  Kary Shumway: If you just tap remone only everybody's credit card and cash, it's just not a thing.
• 20:52
  Kary Shumway: You don't need to worry about it.
• 20:53
  Kary Shumway: If you're in wholesale distribution and you're not in a COD state, accounts receivable, we have got to watch that like a hawk.
• 21:02
  Kary Shumway: Uh certain states can be the credit terms are all over the place, but it you know, it could be 10 days with a five-day grace period as it is in New Hampshire, could be 60 days as it is in Massachusetts, could be COD as it is in Vermont.
• 21:14
  Kary Shumway: It's wacky.
• 21:15
  Kary Shumway: But so if you've got receivables, we really need to watch those.
• 21:19
  Kary Shumway: And for each of these receivables, inventory, payables, debt service, we want to know, you know, what's our target, and then where are we actually relative to that target?
• 21:31
  Kary Shumway: So with receivables, these are just uncollected sales.
• 21:34
  Kary Shumway: So let's say we're in wholesale, you know, let's maybe we're even self-distributing.
• 21:39
  Kary Shumway: That can be particularly tough for on accounts receivable, um, trying to track down all those retailers to get them to pay.
• 21:45
  Kary Shumway: Um, but what we first want to look at is what's the goal for days' sales outstanding?
• 21:51
  Kary Shumway: So that's going to be the ratio we want to watch.
• 21:53
  Kary Shumway: Day's sales outstanding.
• 21:54
  Kary Shumway: It's really just a measurement of how efficiently we're managing and collecting on our receivable.
• 21:59
  Kary Shumway: So if we say a day's sales outstanding is 25, that basically means we have 25 days worth of sales sitting uncollected.
• 22:07
  Kary Shumway: And then what's our that's that's our goal, 25 days.
• 22:11
  Kary Shumway: And then what are our actual days outstanding of 35?
• 22:14
  Kary Shumway: So right away we can say, well, we've got our days actually outstanding are 35.
• 22:19
  Kary Shumway: That's higher than my goal of 25.
• 22:21
  Kary Shumway: Uh I gotta take a closer look at this.
• 22:23
  Kary Shumway: The other way to look at receivables is we run those account receivable aging reports, you know, 0 to 15, 0 to 30.
• 22:29
  Kary Shumway: 30, 30 to 60, you've seen these things.
• 22:32
  Kary Shumway: And it's pretty evident who's overdue and and whatnot.
• 22:35
  Kary Shumway: But a day's sales outstanding ratio can quickly show you how you're doing relative to your goal.
• 22:42
  Kary Shumway: Now, a lot of these are going to be dependent on what your credit terms are.
• 22:46
  Kary Shumway: So in this example, credit terms might be say 30 days.
• 22:49
  Kary Shumway: So we got to be below 30 days.
• 22:51
  Kary Shumway: Nobody should be paying over that when in fact our day's sales outstanding shows us that looks like they are, because we are at 35 days.
• 22:59
  Kary Shumway: So measuring that, the other way, other thing to measure is the obvious.
• 23:02
  Kary Shumway: Like if you've got overdue, to always look at that over 30 and certainly over 60 and over 90 and just hammer home on those.
• 23:08
  Kary Shumway: So the best way to improve those is to have a good credit management policy and to be actively managing this.
• 23:15
  Kary Shumway: Because it's interesting, you know, people don't pay unless you, you know, send them an invoice and then bug them if they don't pay it.
• 23:21
  Kary Shumway: And so it's it's helpful to have a good cash system to track those down.
• 23:26
  Kary Shumway: The other cash flow ratio that's that's applicable to pretty much every brewery is the inventory.
• 23:32
  Kary Shumway: So the ratio, the key metrics that we want to look at here, days on hand.
• 23:37
  Kary Shumway: That's basically like how much how many days worth of sales on hand do I have right now in inventory?
• 23:42
  Kary Shumway: How long could I sell this before I run out?
• 23:44
  Kary Shumway: And how do I set a goal for what is the right amount of inventory?
• 23:48
  Kary Shumway: Because that's the fundamental question that this ratio is answering is like, what's the right amount of inventory?
• 23:55
  Kary Shumway: We don't want too much because it's consuming cash, we don't want too little, because then we run out and we lose sales, that's really bad.
• 24:02
  Kary Shumway: We want just the right amount.
• 24:03
  Kary Shumway: So how do we figure that out?
• 24:06
  Kary Shumway: Well, we can measure it.
• 24:07
  Kary Shumway: We can say, like, what is our goal based on how quickly we can replenish that inventory?
• 24:12
  Kary Shumway: So if we think about finished goods inventory, maybe we need 14 days on hand because we can crank out you know more beer to replace that right behind it.
• 24:21
  Kary Shumway: So if that's our goal, 14 days on hand, and maybe it's 50, maybe it's 20.
• 24:25
  Kary Shumway: So you have to evaluate your circumstance.
• 24:27
  Kary Shumway: But in this example, say it's 14, and then we do our actual measurement, and we find that we've got actually 21 days on hand, so we've got like 50% more inventory than we need.
• 24:37
  Kary Shumway: That's a lot of cash.
• 24:39
  Kary Shumway: So now we gotta dig in.
• 24:40
  Kary Shumway: All right, well, what's on hand right now?
• 24:42
  Kary Shumway: Do we have slow moving items?
• 24:45
  Kary Shumway: Um, do we have sales that you know are just about to go through and that number is gonna come down?
• 24:51
  Kary Shumway: You know, what's what's the situation here?
• 24:53
  Kary Shumway: So, really the red flag, days on hand significantly higher than our days on hand goal.
• 24:59
  Kary Shumway: Accounts payable, this is just money that we owe suppliers and vendors that we haven't paid yet.
• 25:04
  Kary Shumway: Setting a goal here, days payable outstanding, which is really how efficiently we're managing our payment process around accounts payable.
• 25:13
  Kary Shumway: You know, when we want to pay on time or right around there, but not too early.
• 25:17
  Kary Shumway: So when we measure this, setting a goal that usually correlates to the vendor credit terms, and then comparing against that goal.
• 25:26
  Kary Shumway: So if our goal is uh 30 days or right around there, because that's what our average vendors give us for terms, then I want to measure this and see how we're doing.
• 25:35
  Kary Shumway: And in this case, we're at 21 days.
• 25:37
  Kary Shumway: So we're for some reason we're paying too quickly.
• 25:39
  Kary Shumway: Now we may look into this and say, well, we get discounts, so it kind of makes sense, or maybe we just said, now we're just, you know, we're just paying the bills as as they come in, or you know, whatever the whatever the process might be.
• 25:52
  Kary Shumway: But this will at least flag you to say, hey, it looks like we're paying too quickly.
• 25:56
  Kary Shumway: Let's let's take a peek at this.
• 25:58
  Kary Shumway: So those are just three of them again.
• 26:01
  Kary Shumway: Inventory, these are important cash flow levers.
• 26:04
  Kary Shumway: Because again, what you're doing is you're saying, if our ratios are off target, first of all, I just need to know that.
• 26:09
  Kary Shumway: What are my targets?
• 26:11
  Kary Shumway: Where am I actually?
• 26:12
  Kary Shumway: And then the next is what levers can we pull?
• 26:14
  Kary Shumway: So again, with receivables, active cash collections process with inventory, really scrutinizing what you've got on the floor, making sure you've got good inventory counts, looking at uh your full portfolio, and just trying to determine do we have slow-moving uh excess inventory, do we have out of out-of-code product in here?
• 26:37
  Kary Shumway: You know, what's going on?
• 26:38
  Kary Shumway: And accounts payable is really scrutinizing your payable process.
• 26:42
  Kary Shumway: Now, this focuses on not paying too soon, but when you get in there, you can also look at your payable process and say, all right, what else could how else what could we improve in here?
• 26:53
  Kary Shumway: So we have this simple three-step system where every purchase has to come with a purchase order to control the spend.
• 27:01
  Kary Shumway: Then we need a receiving document that matches up, hey, what did we physically receive?
• 27:05
  Kary Shumway: Does that match the purchase order?
• 27:07
  Kary Shumway: Is there any damage or breakage or you know, shortages or misshipments?
• 27:13
  Kary Shumway: And then lastly is the invoice.
• 27:14
  Kary Shumway: Does that match up with those other two documents?
• 27:17
  Kary Shumway: Did we the invoice does that have the proper pricing and units that we actually agreed to when we placed the purchase order?
• 27:25
  Kary Shumway: So there's a lot going on there, but those are also opportunities not just to you know run a cash flow ratio and see if we're on track or not, but really how can we improve the overall process of paying out money and maybe finding some opportunities along the way.
• 27:42
  Kary Shumway: Number four, sales decline, margin erosion.
• 27:45
  Kary Shumway: So I I find that a helpful tool for this is to do some trend analysis, and you can do this for over whatever period you like.
• 27:54
  Kary Shumway: Typically, when I'm doing this, I'm looking at 12 to 24 months, 12 to 18 months, something like this.
• 28:00
  Kary Shumway: Um, and I'm really just looking at sales, cost of goods, margin, and margin percentage, and really with an emphasis on that margin percentage, because the easiest way to look and say, are we getting better or worse?
• 28:12
  Kary Shumway: So in this example, you know, we've got January through December with sales, cogs, and margin.
• 28:19
  Kary Shumway: In January, our margin's at 60%, then it's at 58% in February, then 58.5 in March, looking okay.
• 28:26
  Kary Shumway: 57 now in April.
• 28:27
  Kary Shumway: Now I'm like, okay, we're starting to decline, then 56 in May, 56.4, 56.2, 53.9.
• 28:34
  Kary Shumway: So the decline is pretty steady.
• 28:37
  Kary Shumway: Now, sometimes you'll see a lot of volatility.
• 28:39
  Kary Shumway: One month is good, one month is bad, and then that repeats.
• 28:43
  Kary Shumway: That can be an indicator of other red flags, most likely inventory, inventory valuation, your counts are off.
• 28:50
  Kary Shumway: There could be some errors in purchasing activity, but looking at the margin does a couple things.
• 28:57
  Kary Shumway: One is you should have an expectation of what that margin number should be based on what you're selling and the underlying price and cost of those products.
• 29:06
  Kary Shumway: So we really have to start with that as a baseline.
• 29:09
  Kary Shumway: Like what is our expectation?
• 29:12
  Kary Shumway: And if we come up to say, well, you know, based on what we're selling, and the and I've looked at the details, you know, we should rerun it around a 60% margin.
• 29:19
  Kary Shumway: Now, when your margin starts to decline to 57, 53, 53.7, 52.7, and then now you know I've got some some problems.
• 29:28
  Kary Shumway: So above and beyond just a decline and an erosion, uh, we want to compare this to an expectation, you know, and be watching that on a regular basis.
• 29:37
  Kary Shumway: And usually what we'll do is we can set up um spreadsheets so that we can look at this on a daily and weekly basis.
• 29:44
  Kary Shumway: So that may be necessary depending on your situation, or this is just part of your monthly analysis to say, are we what's going on with sales?
• 29:53
  Kary Shumway: What's going on uh with margin and what what does that percentage look like?
• 29:59
  Kary Shumway: So the fifth red flag, wholesale margins are below benchmarks.
• 30:03
  Kary Shumway: Now, what I've found seems to be one of the bigger problems or opportunities, I guess, for breweries that are in wholesale is they don't really understand their actual margins.
• 30:16
  Kary Shumway: We sort of have an interesting gut feel on this, like you know, sales, maybe sales are are good and growing, and so that feels like that's a part of our business we really want to lean into.
• 30:27
  Kary Shumway: Um we don't really have a good understanding of the cost of those sales, and it can be quite shocking when we actually do the math.
• 30:35
  Kary Shumway: So that's what I encourage you to do in order to spot this financial red flag is to set up a spreadsheet like this, a little analysis tool, where you're looking at each brand and package type.
• 30:48
  Kary Shumway: Now you don't need to necessarily do it for every single because if you've got like you know 50 or 100, you're just brewing new beers all the time.
• 30:54
  Kary Shumway: That could be a little tricky.
• 30:56
  Kary Shumway: But if you got some, you know, top two, three, five, just to do the exercise.
• 31:00
  Kary Shumway: So you start with your best-selling brand, the different packages that you sell it in, and then we're gonna aggregate some information.
• 31:08
  Kary Shumway: First, we're gonna figure out let's do the easy stuff first.
• 31:11
  Kary Shumway: What is the price to wholesaler, the PTW?
• 31:13
  Kary Shumway: So if you're selling to wholesaler, uh if you're self-distributing, you just change it to you know price to retailer.
• 31:19
  Kary Shumway: But in this example, brand number one, half barrel, six barrels, and so forth, here's our PTW, our price to wholesale.
• 31:26
  Kary Shumway: We list that out.
• 31:27
  Kary Shumway: Next, and what's usually the next easiest is what is our what are our material cost to goods sold?
• 31:34
  Kary Shumway: And if you're you running a system like Beer 30 or Ecos or Brew or any of these, you can you should be able to pretty quickly figure out what your material costs are by brand and package.
• 31:45
  Kary Shumway: They do a pretty good job of that.
• 31:47
  Kary Shumway: So that's that's the next input.
• 31:49
  Kary Shumway: Now, labor cost of goods and overhead costs.
• 31:52
  Kary Shumway: This is where most folks get tripped up.
• 31:54
  Kary Shumway: Like, how do we how do we do that?
• 31:56
  Kary Shumway: Um, so there are ways to do it.
• 31:58
  Kary Shumway: Uh the simplest way is simply aggregate those pools of costs and divide it by um total barrels sold.
• 32:06
  Kary Shumway: And then you can push that down pro rata based on your you know different types of packages.
• 32:12
  Kary Shumway: So, for example, um you aggregate for a period of time, say for last year, what was your total production packaging labor divided by the total barrels that you sold?
• 32:23
  Kary Shumway: That will give you a labor cost of goods per barrel.
• 32:27
  Kary Shumway: And then you just do the math to say, well, one barrel has labor costs of say$50 per barrel.
• 32:32
  Kary Shumway: A half barrel is half of that, so it's$25 and so forth.
• 32:36
  Kary Shumway: So you're really allocating it just based on the liquid.
• 32:38
  Kary Shumway: It's not perfect, uh, but at least give you kind of a directionally uh correct way to kind of look at this.
• 32:43
  Kary Shumway: Do the same thing with overhead.
• 32:45
  Kary Shumway: So overhead, the this gets confusing too, because we're like, what goes in there?
• 32:49
  Kary Shumway: So the general guidance, the one-sentence filter for you know, is this a cost of goods sold or not, is is this cost necessary to the production and packaging of my beer?
• 33:01
  Kary Shumway: Um, so anything that you couldn't make your beer without that cost, then it goes in cost of goods.
• 33:06
  Kary Shumway: Now, overhead, we don't want to go too crazy with this, so particularly when we're first starting out, but we want to say what are the major components of overhead cost of goods sold.
• 33:16
  Kary Shumway: It's usually going to be occupancy, um, utilities, insurance, depreciation.
• 33:23
  Kary Shumway: So I encourage you to just find your top five overhead items that kind of fall into those categories, aggregate them, divide it by total barrel sold, and that will give you overhead cogs per barrel, and then you can just follow the same process with your labor.
• 33:38
  Kary Shumway: So getting it's getting it set up does take a little bit, uh, but once you're set, you've got a pretty good window into what are your actual margins.
• 33:45
  Kary Shumway: Alright, so now you can do the analysis, and on this sheet, what we're looking at is I've grabbed all of my costs, I got my price to wholesale, or I see my margin in dollars per brand package, and now I see the margin in percentage.
• 33:58
  Kary Shumway: Now, here again, we want to have some targets.
• 34:00
  Kary Shumway: What should my target be?
• 34:02
  Kary Shumway: You know, generally speaking, 40 to 45% is what you're shooting for at wholesale.
• 34:08
  Kary Shumway: And these margins demonstrate that your half barrel and your six barrel look in line, and your 12 ounce six packs and sixteen ounce four-pack look pretty darn low.
• 34:19
  Kary Shumway: Sometimes it's just the market, you know.
• 34:22
  Kary Shumway: Sometimes you're gonna have packages that are lower.
• 34:24
  Kary Shumway: The name of the game is to get a blended gross margin in that 40 to 45% range.
• 34:29
  Kary Shumway: So you have to start with looking at your financials and running.
• 34:34
  Kary Shumway: We typically say if you're using QuickBooks, you've got to set up a class, you get to set up classes so you can see sales, cogs, margins, just for your wholesale business.
• 34:45
  Kary Shumway: Sometimes the the financial statements are just all combined, and it's really hard to tell um you know what your margins are for the tap room versus wholesale.
• 34:55
  Kary Shumway: Uh so it gets we need to separate those out.
• 34:58
  Kary Shumway: So step one, separate them out so you can see what your wholesale margins are compared to the benchmarks where you need to be.
• 35:05
  Kary Shumway: And then if you're off plan, and even if you're on plan, run run a schedule like this so you can see by brand and package what your margins are.
• 35:13
  Kary Shumway: So that could be a big red flag.
• 35:14
  Kary Shumway: And in this case, I would say that it is.
• 35:16
  Kary Shumway: If we've got 15% margins on a package, we got to dig in.
• 35:21
  Kary Shumway: What can we do?
• 35:22
  Kary Shumway: Can we do anything with pricing?
• 35:24
  Kary Shumway: What are the costs that are in here?
• 35:25
  Kary Shumway: Can we do anything uh with those costs of goods sold?
• 35:28
  Kary Shumway: Can we drive can we drop this SKU altogether?
• 35:32
  Kary Shumway: So it really is just raising the awareness, and then the next step is what action items are you gonna take in order to improve it.
• 35:41
  Kary Shumway: Okay, so failing the financial health checkup is uh red flag number six.
• 35:48
  Kary Shumway: So here I have uh four ratios for you to look at.
• 35:52
  Kary Shumway: So we've got our current ratio, debt to equity, inventory turnover, and a debt service coverage ratio.
• 35:59
  Kary Shumway: So each of these ratios is gonna do something a little bit different.
• 36:02
  Kary Shumway: Um the current ratio is gonna measure our liquidity.
• 36:06
  Kary Shumway: Basically, can we pay our bills on time?
• 36:08
  Kary Shumway: So a lower rate here might indicate that you know we've got tight cash flow.
• 36:13
  Kary Shumway: A higher rate might mean that we've got idle assets.
• 36:16
  Kary Shumway: So what we're doing is we're taking our balance sheet and we're gonna get from our balance sheet our current assets divided by our current liabilities.
• 36:25
  Kary Shumway: Um, so if you run your balance sheet, typically these will be subtotals on there, the current assets section, current liability section.
• 36:32
  Kary Shumway: So you should be able to find it.
• 36:34
  Kary Shumway: So that would be step one to run the financial health checkup on your business and see where you come in and to see if you're within this range.
• 36:44
  Kary Shumway: So take your total current assets divide by total current liabilities and calculate that, and then healthy target is in that one and a half to two times range.
• 36:54
  Kary Shumway: The next part of our financial health checkup, the debt to equity ratio.
• 36:59
  Kary Shumway: This is a big one.
• 37:00
  Kary Shumway: It's a leverage ratio.
• 37:01
  Kary Shumway: Really, how well are we using debt?
• 37:04
  Kary Shumway: Are we borrowing too much?
• 37:06
  Kary Shumway: Uh, can we cover our debts?
• 37:08
  Kary Shumway: So here we're looking at total long-term liabilities divided by total equity.
• 37:15
  Kary Shumway: And what we're looking at here is somewhere around one, say one to two times uh for a result.
• 37:22
  Kary Shumway: So basically, liabilities and equity are about the same, or on the high side, liabilities are about twice as big as equity.
• 37:29
  Kary Shumway: So, as a real life example, you might say, hey, we've got loans of uh$200,000, we've got total equity of$100,000, that's a debt to equity of two to one.
• 37:39
  Kary Shumway: So again, that's kind of on the high side.
• 37:41
  Kary Shumway: Now, a lot of times, if you've been in business for a while and haven't been super profitable, you go down to that equity section, there's there's no equity.
• 37:48
  Kary Shumway: It's a you're you're in a deficit position.
• 37:50
  Kary Shumway: Uh so there right away that debt to equity ratio is gonna kind of get blown up.
• 37:54
  Kary Shumway: Now, banks have seen this before, so then they may not be completely scared off by this, but it's just something to be aware of uh and part of your health checkup.
• 38:03
  Kary Shumway: Next, inventory turnover.
• 38:04
  Kary Shumway: We talked about this in um our cash flow ratios, and I use the term days on hand to measure your inventory.
• 38:12
  Kary Shumway: I just particularly like that one.
• 38:13
  Kary Shumway: Inventory turnover is essentially measuring the same thing, it's looking at your operational efficiency, you know, how efficiently you're you know carrying and selling and turning over that inventory.
• 38:24
  Kary Shumway: So it's really really are we managing our total inventory portfolio efficiently, or are we tying up cash in slow-moving items?
• 38:34
  Kary Shumway: So the math on this works like this: we take our total cost of goods sold, we divide it by our average inventory, and that's going to give us the total inventory turns.
• 38:44
  Kary Shumway: Now, cost of goods sold, we've measured, we take the a full annual COGS number there, divide it by a static average inventory, take whatever your inventory is at the end of a given month, or average inventory for each of your month ends, uh, and then come up with your ratio there.
• 39:00
  Kary Shumway: And typically four to eight times is kind of a healthy range.
• 39:04
  Kary Shumway: Obviously, higher is better.
• 39:06
  Kary Shumway: The last ratio to look at on your financial health checkup is debt service coverage ratio.
• 39:11
  Kary Shumway: So it's gonna show your cash flow strength, how well you're able to cover your debt payments.
• 39:17
  Kary Shumway: So here we're looking at this term called EBITDA.
• 39:20
  Kary Shumway: This is a simpler way to say net operating income.
• 39:24
  Kary Shumway: So it's earnings before interest, taxes, depreciation, and amortization.
• 39:28
  Kary Shumway: And we're gonna divide that by our principal and interest payments.
• 39:31
  Kary Shumway: What are you paying each month, each year?
• 39:34
  Kary Shumway: And what we're looking at is for your EBITDA to be bigger than the amount that you're gonna be paying out.
• 39:41
  Kary Shumway: So in this case, a healthy target range is somewhere north of 1.2, 1.3.
• 39:47
  Kary Shumway: Many banks I want it you know, more like 1.5.
• 39:50
  Kary Shumway: So it's really just can the brewery generate enough cash to cover the loan payments?
• 39:54
  Kary Shumway: And if you're under one, clearly that's a danger sign.
• 39:58
  Kary Shumway: You know, if your cash coming in is about the same as the cash going out just for your debt, uh, that can be a signal, real red flag to check out.
• 40:06
  Kary Shumway: So run these, try these, see if they're helpful for you.
• 40:10
  Kary Shumway: Um, as you can see, these are very balance sheet heavy.
• 40:15
  Kary Shumway: A lot of times when we run financial health checkups, we're looking at our sales growing, our margins eroding, you know, what's that?
• 40:21
  Kary Shumway: Net operating income.
• 40:22
  Kary Shumway: You know, this is really looking at it more from a perspective of, you know, what are your assets and liabilities look like?
• 40:27
  Kary Shumway: What are your liabilities compared to your equity and things like that.
• 40:30
  Kary Shumway: So I think this could be a helpful way to just take an assessment of and possibly identify some red flags for your business.
• 40:39
  Kary Shumway: The oh, this is just a little, I'm gonna expand on this a little bit here in terms of failing uh the health checkup.
• 40:44
  Kary Shumway: So this is just an example of what your scorecard might look like.
• 40:47
  Kary Shumway: Uh so it's taking current ratio, kind of showing you the math and the target, debt to equity and so forth.
• 40:52
  Kary Shumway: And as you get down to debt service coverage ratio, and this is when your bank is gonna probably be at, you're probably doing it anyway right now, but to do it on a monthly basis so you can see, you know, what is our EVITA, what are our principal and interest payments, and what does that compute to in terms of a debt service coverage ratio, and then what is the requirement from our bank for that.
• 41:14
  Kary Shumway: So this can be a handy little scorecard.
• 41:17
  Kary Shumway: It does it shouldn't take long to fill these out.
• 41:19
  Kary Shumway: That's the thing, too, is you know, we don't want to spend a ton of time just you know building spreadsheets.
• 41:24
  Kary Shumway: We want stuff that's gonna give you good visibility into what's happening so that you can spot these red flags early.
• 41:32
  Kary Shumway: Okay, our seventh uh check here for red flags, key retail ratios being off target.
• 41:40
  Kary Shumway: So, what are the retail ratios?
• 41:41
  Kary Shumway: You're probably tracking some of these now.
• 41:43
  Kary Shumway: These are pretty standard.
• 41:44
  Kary Shumway: Front of house labor is a percentage of sales, back of house labor as a percentage of sales, food costs as a percentage of sales.
• 41:51
  Kary Shumway: So you if you've got food, you know, you're probably measuring these prime costs.
• 41:55
  Kary Shumway: But are you tracking the what I find is interesting is sometimes we'll know what they are, but we're not, we don't have a target, we don't have a goal.
• 42:01
  Kary Shumway: We're not shooting necessarily for anything.
• 42:02
  Kary Shumway: We might be comparing it to the prior year, uh, we might be just looking at it.
• 42:07
  Kary Shumway: But the goal is like, where are we?
• 42:09
  Kary Shumway: What's the target?
• 42:11
  Kary Shumway: What's the gap?
• 42:12
  Kary Shumway: What are the action items we're gonna take to close the gap?
• 42:15
  Kary Shumway: Repeat.
• 42:16
  Kary Shumway: So in this case, front of house labor is a percentage of sales, we've established a target, 15 to 25 percent.
• 42:22
  Kary Shumway: Let's be specific.
• 42:23
  Kary Shumway: Let's say our target's 20, then we're running our numbers.
• 42:27
  Kary Shumway: You can do this every day, every week.
• 42:30
  Kary Shumway: You know, I kind of like that cadence because we're constantly looking, particularly if it's a problem.
• 42:34
  Kary Shumway: So we've set a target.
• 42:36
  Kary Shumway: Now, where do you get your cart your target?
• 42:37
  Kary Shumway: So these 15 to 25 percent is typically what I'll see.
• 42:41
  Kary Shumway: You know, it really depends on a lot of factors, but you need to pull a number out as an average.
• 42:47
  Kary Shumway: I I we typically will start with 20%.
• 42:50
  Kary Shumway: Um, but if I would look at your historical numbers too, and just kind of go back 12, 18, 24 months and run the numbers.
• 42:59
  Kary Shumway: Like, well, where have you been?
• 43:00
  Kary Shumway: What was labor as a percentage of sales?
• 43:03
  Kary Shumway: Look at it on a monthly basis.
• 43:04
  Kary Shumway: Do you see fluctuations in there?
• 43:06
  Kary Shumway: Is it you have some months that are really good?
• 43:08
  Kary Shumway: Do you have some months that are actually quite a bit higher?
• 43:11
  Kary Shumway: So the name of the game is to understand sort of an industry benchmark, what might be a 20% target, but for you, um perhaps the target is different.
• 43:20
  Kary Shumway: So you gotta kind of look back, and the goal is better as you're setting these targets.
• 43:24
  Kary Shumway: So if you run your numbers and you're like, wow, we're running more like 28 to 30 percent, okay.
• 43:28
  Kary Shumway: You know, then maybe your target's 25.
• 43:31
  Kary Shumway: How do we get to 25?
• 43:32
  Kary Shumway: What let's look at the details.
• 43:34
  Kary Shumway: Uh, but the first step is know what your numbers are, set a target, identify gaps, work to close the gaps, repeat.
• 43:40
  Kary Shumway: Back of house labor, same idea.
• 43:42
  Kary Shumway: What's the target?
• 43:44
  Kary Shumway: You know, if you look at all sorts of industry data, your target's probably around 30%.
• 43:48
  Kary Shumway: So, what's your target?
• 43:50
  Kary Shumway: You need to look at that, you know, for yourself.
• 43:53
  Kary Shumway: Food costs as a percentage of sales, obviously an important item to track, as you know.
• 43:58
  Kary Shumway: If you sell food, those margins are quite a bit tighter than on your beer.
• 44:02
  Kary Shumway: So setting up a tracker for this too.
• 44:04
  Kary Shumway: What are your food costs as a percentage of sales historically?
• 44:07
  Kary Shumway: Run it by month, see if there's again dips and spikes, and then dig in on those.
• 44:11
  Kary Shumway: If you've got a month that or a series of months where your costs were at a nice, say 25, 26%, then other months where it was 32, 34%.
• 44:21
  Kary Shumway: You know, what's happening during those times?
• 44:25
  Kary Shumway: So the red flags are going to be when we start deviating from front of house, back of house labor.
• 44:30
  Kary Shumway: And our food costs compared to our targets.
• 44:34
  Kary Shumway: Most of your point of sale systems that you're using can can generate this data for you.
• 44:41
  Kary Shumway: So it's really just a matter of setting up the time to look at it on a regular basis to set those goals, identify gaps, and close them.
• 44:51
  Kary Shumway: Okay, so those are our seven red flags.
• 44:53
  Kary Shumway: Those are seven ways that you can kind of keep your eyes peeled for financial red flags that can creep creep into your uh into your business.
• 45:02
  Kary Shumway: So once you've figured out the red flag, the next is like what's causing this?
• 45:07
  Kary Shumway: What is the actual root cause of this?
• 45:09
  Kary Shumway: And I often think about inventory.
• 45:12
  Kary Shumway: Um, so say one of our red flags is tracking inventory, constantly doing the count but never being right.
• 45:22
  Kary Shumway: We have variances all the time.
• 45:24
  Kary Shumway: Like, why is this happening?
• 45:25
  Kary Shumway: What's going on?
• 45:26
  Kary Shumway: The challenge is that we usually spend a lot of time counting, and then once the count's done, we we gotta get back to work.
• 45:32
  Kary Shumway: So we don't have enough time to analyze it.
• 45:34
  Kary Shumway: So I'd encourage you as you're thinking about root cause analysis is to slow down and dig in there and figure out what's causing this.
• 45:43
  Kary Shumway: So for inventory, we might think about what are the different things going on.
• 45:48
  Kary Shumway: So with inventory, we're receiving it.
• 45:50
  Kary Shumway: So we could have a breakdown there.
• 45:51
  Kary Shumway: Did we did we actually count the stuff when it got off the truck, or did we just assume that what the receiving document said was physically on the truck?
• 46:00
  Kary Shumway: Uh maybe we're we're shipping, we're picking, we're packing, we're shipping.
• 46:03
  Kary Shumway: Did we double check that what we physically picked matched the order that we were supposed to pick it, be picking?
• 46:10
  Kary Shumway: You know, do we have double checks in place for that?
• 46:12
  Kary Shumway: Things happen, you know, mistakes happen.
• 46:13
  Kary Shumway: So these are all ways an inventory can get off.
• 46:15
  Kary Shumway: Do we record breakage?
• 46:17
  Kary Shumway: Stuff breaks.
• 46:18
  Kary Shumway: What's the system for you know recording that?
• 46:21
  Kary Shumway: Because if the computer doesn't know about it, you know, we drop a drop a case, it's damaged, we gotta check it, um, then the inventory is gonna be wrong.
• 46:30
  Kary Shumway: Because we're counting the physical count based on you know what we see, and then we're comparing it to what the computer says we should have.
• 46:38
  Kary Shumway: But if we broke that case, you know, the the computer's not gonna know about it, and it's gonna be uh a write-down.
• 46:44
  Kary Shumway: So, what are the processes for those things?
• 46:46
  Kary Shumway: So every financial red flag has an operational root cause.
• 46:50
  Kary Shumway: We just need to figure it out.
• 46:51
  Kary Shumway: So, some other examples, declining margins.
• 46:54
  Kary Shumway: We talked about that.
• 46:55
  Kary Shumway: You know, maybe that's pricing errors.
• 46:57
  Kary Shumway: You know, maybe we just haven't evaluated uh what our price for our brands and our products should be well enough.
• 47:03
  Kary Shumway: So we we can't see that until we pull together the costs, look at the margins as as a whole.
• 47:12
  Kary Shumway: Negative cash flow might stem from those two cash drivers we talked about.
• 47:15
  Kary Shumway: Too much inventory, too much receivables.
• 47:18
  Kary Shumway: You know, what do we do about it?
• 47:20
  Kary Shumway: So with with receivables, a lot of times, particularly if you're in self-distribution, um it can just get out of hand because you might have dozens or hundreds of retail accounts, and a percentage of those, maybe it's a small percentage, but a large number of accounts, just don't pay or don't pay on time.
• 47:39
  Kary Shumway: So the negative cash flow can come from that.
• 47:42
  Kary Shumway: Just the root causes.
• 47:43
  Kary Shumway: We need a cash management system.
• 47:45
  Kary Shumway: Labor cost spikes, these can tell us about scheduling inefficiencies.
• 47:50
  Kary Shumway: You know, I think we generally do pretty good at this.
• 47:52
  Kary Shumway: You know, we know when it's slow, we know when it's going to be heavy, we try to staff accordingly, but maybe we're not looking at it in terms of actual numbers.
• 47:58
  Kary Shumway: And I think that's where front-of-house labor is a percentage of sales and back-of-house labor as a percentage of sales can really highlight that for us.
• 48:07
  Kary Shumway: Uh, and whenever we run this, we do see a lot of volatility from month to month.
• 48:11
  Kary Shumway: So that's kind of interesting and could provide the root cause answer in terms of how you can smooth out those labor cost spikes.
• 48:18
  Kary Shumway: So the key is really slowing down and doing the analysis, and then of course asking why repeatedly until we can figure out what's actually going on, and then we can work on implementing a fix that will stick.
• 48:34
  Kary Shumway: So, as we are watching out for these red flags, and as we are trying to figure out what the root cause of them are, sometimes it's helpful to slow down and say, hey, let's stabilize things first, because we might be in a tailspin.
• 48:47
  Kary Shumway: You know, cash might be like we are gonna run out of cash.
• 48:50
  Kary Shumway: So, talk about this concept of stabilize first turnaround method.
• 48:55
  Kary Shumway: Uh, so save the patient first.
• 48:57
  Kary Shumway: So stop the bleeding.
• 48:58
  Kary Shumway: What does this mean?
• 48:59
  Kary Shumway: Cut discretionary spending.
• 49:01
  Kary Shumway: We've got to identify what that discretionary spending is.
• 49:04
  Kary Shumway: You might want to pause any projects, any non-essential projects that have been working on worked on.
• 49:10
  Kary Shumway: One of the quickest ways that we can help out our cash flow is to renegotiate payment terms with vendors, sometimes lenders.
• 49:20
  Kary Shumway: Um, so digging in on those areas, how can we stop the bleeding if we're in that situation right now?
• 49:24
  Kary Shumway: Phase two is really restoring visibility because sometimes, as I said in the beginning, we just don't have good insights into what's actually going on financially, what's causing this.
• 49:36
  Kary Shumway: Um, we have so much data, but we're not sure to look at.
• 49:39
  Kary Shumway: So implementing a daily cash tracking sheet, weekly financial scorecards, regular updates of the forecast, super important.
• 49:48
  Kary Shumway: So we'll know where we stand at all times, and furthermore, where we're going.
• 49:53
  Kary Shumway: So if we're all working together to forecast what's coming next, take action to hit those, uh, that's how we really restore that visibility.
• 50:00
  Kary Shumway: And the in the third phase is to fix core operations.
• 50:03
  Kary Shumway: So again, root cause operational issues could be pricing, labor efficiency, inventory management, accounts receivable management.
• 50:11
  Kary Shumway: The hard part is if we go through this and we identify, boy, there's like a lot we need to fix.
• 50:16
  Kary Shumway: You got to do it one at a time because it's just gonna become overwhelming.
• 50:19
  Kary Shumway: So we can think about these monthly focus items.
• 50:24
  Kary Shumway: So maybe, you know, month one, hey, we're gonna focus on pricing.
• 50:27
  Kary Shumway: We gotta, that's our quickest way to improve margins and profitability.
• 50:32
  Kary Shumway: So this month coming up, it's pricing month.
• 50:35
  Kary Shumway: Next, it's inventory management.
• 50:37
  Kary Shumway: We gotta figure this out.
• 50:38
  Kary Shumway: It's always off, we're always running out or have too much.
• 50:40
  Kary Shumway: So maybe that month two is inventory management, and so forth.
• 50:43
  Kary Shumway: And you just kind of just like any big problem, you break it down into smaller pieces.
• 50:48
  Kary Shumway: All right, here are a handful of high impact fixes for cash flow.
• 50:53
  Kary Shumway: Now I'll say this is just three.
• 50:54
  Kary Shumway: There are so many, there are so many cool ways to find new fixes.
• 51:00
  Kary Shumway: Um I'm a particular fan of the workshop or playbook, you know, brainstorming, engaging your team, thinking about ways uh to improve the business.
• 51:09
  Kary Shumway: You know, you could use this same process with, you know, how are we going to reduce expenses, or how are we gonna better staff the taproom, or what other product offerings could we have for our customers?
• 51:18
  Kary Shumway: Um, but you can look that up workshop or playbook to learn more about it.
• 51:22
  Kary Shumway: But it's just a cool way to brainstorm and get a lot of input and great ideas.
• 51:27
  Kary Shumway: So here are three ways strategic price adjustments.
• 51:30
  Kary Shumway: I think we all know that raising prices, if we can, uh is the quickest way to get that margin profit impact.
• 51:37
  Kary Shumway: It's immediate and can be significant.
• 51:40
  Kary Shumway: Taproom revenue boosts.
• 51:43
  Kary Shumway: So we have lots of opportunities to sell to our customers, but we have to ask.
• 51:47
  Kary Shumway: So this requires a little bit of training.
• 51:49
  Kary Shumway: We use the word upsell training.
• 51:52
  Kary Shumway: Um, we can also gear our customers towards higher margin food items.
• 51:58
  Kary Shumway: We call this menu engineering.
• 52:00
  Kary Shumway: Uh, we can really focus on merchandising.
• 52:02
  Kary Shumway: There's so many opportunities.
• 52:03
  Kary Shumway: When someone walks into your really the goal is give them things to buy, they're there to buy.
• 52:08
  Kary Shumway: They're there because they love your beer, or they love the vibe, and they want to check it out.
• 52:13
  Kary Shumway: So give them opportunities, make it easy.
• 52:15
  Kary Shumway: Here we also hear about this concept of frictionless buying or frictionless selling.
• 52:19
  Kary Shumway: You know, make it easy for the customer to buy from you.
• 52:22
  Kary Shumway: Can't tell you how many times I walk into a tap room and I want to get to go beer, but I'm like, where is it?
• 52:27
  Kary Shumway: I can't find it.
• 52:28
  Kary Shumway: Or it's way in the corner and there's a big crowd, or I'm not going over there.
• 52:31
  Kary Shumway: Merch, man, I'd really like to buy a hat or a t-shirt.
• 52:34
  Kary Shumway: Where's the merch?
• 52:35
  Kary Shumway: You know, they don't, it's hard to get to.
• 52:38
  Kary Shumway: So just think about that from a perspective of a customer.
• 52:40
  Kary Shumway: How can you make it easier for your customer to buy from you?
• 52:45
  Kary Shumway: Now that ties into this, these loyalty programs, which are really um, I think of just reimagined the mug club because we used to think of the mugs are hanging on a hook, I have a specific number, it's a hundred, hundred and fifty bucks a year, uh, I get a bigger pour, maybe I got a free beer on my birthday.
• 53:02
  Kary Shumway: That's these are all fine, but you know, how do we reimagine that?
• 53:06
  Kary Shumway: How do we reimagine it so that we get recurring revenue?
• 53:09
  Kary Shumway: So that we get recurring customer visits.
• 53:12
  Kary Shumway: You know, maybe that revenue's coming in monthly or quarterly instead of just one shot at the end of the year.
• 53:17
  Kary Shumway: That can really smooth out seasonality if you can build up these loyalty programs.
• 53:22
  Kary Shumway: There's so many cool things you can do with these.
• 53:25
  Kary Shumway: But the other part is we're bringing people back more often because we have two, there's really just two ways we can grow sales through the Taproom is to get more people in and get them to spend more when they come in.
• 53:35
  Kary Shumway: So we're measuring customer traffic, average spend per guest or per ticket, and how do we drive each of those loyalty programs can really do both and give you that recurring revenue on top of that?
• 53:47
  Kary Shumway: So think about that.
• 53:48
  Kary Shumway: And particularly if you've got food, you know, these loyalty programs don't need to be limited to just beer and that mug on the hook.
• 53:56
  Kary Shumway: What about food?
• 53:57
  Kary Shumway: You know, what if you had, you know, and what about bringing in different customers too?
• 54:00
  Kary Shumway: What about the whole family?
• 54:01
  Kary Shumway: Family, it's family pizza night.
• 54:03
  Kary Shumway: You know, it's loyal locals.
• 54:04
  Kary Shumway: You've got people that live around you.
• 54:05
  Kary Shumway: How do you get them to come back more often?
• 54:08
  Kary Shumway: They're already coming in maybe once a week, once every other week.
• 54:10
  Kary Shumway: How do you get them to come in, I don't know, twice a week?
• 54:13
  Kary Shumway: Set up a loyalty program, give them a reason to come back in.
• 54:17
  Kary Shumway: And they usually don't come alone.
• 54:18
  Kary Shumway: You know, they'll bring a friend or a couple friends, and there you go.
• 54:22
  Kary Shumway: So we're driving more.
• 54:23
  Kary Shumway: So I'd really encourage you to check out and think about those loyalty programs.
• 54:28
  Kary Shumway: I guess the last thing I would say on this topic is sometimes you have a legacy mug club and you don't want to get rid of it because you've got members that really that's fine, keep it.
• 54:37
  Kary Shumway: And then you can have other tiers.
• 54:39
  Kary Shumway: So loyalty programs don't need to be static, like it's one mug, it's one hook, we're out of mugs, we can't sell you anymore.
• 54:45
  Kary Shumway: That's like the worst thing you can do.
• 54:46
  Kary Shumway: It's like if people want to buy from you, they want to give you money, they want to be part of what you got going on, consider how you can do that, and loyalty programs are a great way for that.
• 54:57
  Kary Shumway: So the glue that holds this whole thing together is to build a financial early warning system.
• 55:04
  Kary Shumway: And really what that means is you need to have a good financial cadence in your business.
• 55:10
  Kary Shumway: So, in my experience, the best way to do this is to hold these weekly financial huddles.
• 55:15
  Kary Shumway: So, this is your opportunity to review your early warning system numbers, all those kind of ratios that we've talked about and red flags that can pop up and ultimately implement changes.
• 55:25
  Kary Shumway: So, first it's measuring like what is what's the data that we're looking at, and then what's the goal for that?
• 55:33
  Kary Shumway: You know, if we think about inventory days on hand, where are we at?
• 55:36
  Kary Shumway: What's the goal, the target?
• 55:38
  Kary Shumway: And then if we're we have a gap, how are we gonna close it?
• 55:42
  Kary Shumway: You can do the same with you know your sales goals, your daily, weekly sales goals.
• 55:45
  Kary Shumway: Where should we be?
• 55:47
  Kary Shumway: Uh, what's the target, or where are we, what's the target, and what's the gap.
• 55:51
  Kary Shumway: And then importantly, is what are we gonna do to close that gap?
• 55:56
  Kary Shumway: And I when we're doing these weekly, it's you get 52 chances a year to work on closing these if you identify closing these gaps.
• 56:05
  Kary Shumway: Um so it's a bit about uh communication and accountability too.
• 56:08
  Kary Shumway: If we say, all right, I've got a we've got a cash shortfall, here's what it is because here's my specific target, here are the action items that I'm gonna take this week and then I'm gonna report back next week when we meet again.
• 56:20
  Kary Shumway: So it's that virtuous cycle of measuring it, looking at the target, identifying the gaps, action items to close them, meet again for accountability.
• 56:30
  Kary Shumway: And it's also you know a place to help each other.
• 56:33
  Kary Shumway: So if we've got um you know ownership of these numbers, we've got everybody looking at them.
• 56:39
  Kary Shumway: It's an opportunity to support each other as well.
• 56:42
  Kary Shumway: So the little things, you know, an efficient agenda, same day and time, start and stop on time, be respectful of people's time, prepare in advance, focus on solutions.
• 56:52
  Kary Shumway: These are fairly obvious, but I think worth repeating because I've been in many meetings that didn't follow this, and I'm sure you have as well.
• 57:00
  Kary Shumway: So there has to be an element of discipline so that these meetings get the results you want.
• 57:07
  Kary Shumway: You don't want just, oh, we're just gonna have one more meeting.
• 57:10
  Kary Shumway: You know, the goal is ownership of the numbers.
• 57:13
  Kary Shumway: So when we have those clear expectations and we we're training, you know, our managers, sharing information, uh, that's that's really the best way to get these results.
• 57:23
  Kary Shumway: And that's how you can think about building that early warning system in your business.
• 57:27
  Kary Shumway: So the big takeaway here is that these financial turnarounds, they're really not about like one big move or one heroic move.
• 57:36
  Kary Shumway: They're really about discipline, consistency, and identifying red flags earlier so that you can do something about them.
• 57:43
  Kary Shumway: And the breweries that are having success, that are thriving, they they've got problems too, but they're seeing them sooner, responding faster, and implementing actions uh to fix them with confidence because they can understand what are the real data points I should be looking at, how do I see these potential problems earlier, and what do I do about them?
• 58:05
  Kary Shumway: So those weekly financial huddles are the best way to accomplish that.
• 58:09
  Kary Shumway: All right, so that is what I've got for you today.
• 58:12
  Kary Shumway: And again, if you're a brewery in Massachusetts, I'd encourage you to scan this QR code or simply email me carry at beerbusinessfinance.com to learn more about the Massachusetts Workforce Training Fund.
• 58:23
  Kary Shumway: I have got a few courses on there, uh, notably the Brewery Financial Fundamentals course, practical brewery specific program that can help owners and managers really understand your numbers, gain control of cash flow.
• 58:36
  Kary Shumway: Super important these days.
• 58:38
  Kary Shumway: And if your brewery is eligible, you'll receive between 50 and 100% reimbursement for the training program.
• 58:44
  Kary Shumway: Uh so I can show you how that works.
• 58:46
  Kary Shumway: You can scan the QR code or shoot me an email, Carrie at beerbusinessfinance.com, K-A-R-Y at beer businessfinance.com, and I'd love to hear how your business is going.
• 58:58
  Kary Shumway: See if there's anything I can do to help you out.
• 59:00
  Kary Shumway: So here's my contact information.
• 59:02
  Kary Shumway: Easiest way to get in touch again, Carrie at beerbusinessfinance.com.
• 59:06
  Kary Shumway: So I know your time is valuable and I hope you found some value here in this presentation.
• 59:11
  Kary Shumway: Encourage you to check out, try some of these out for yourself.
• 59:14
  Kary Shumway: You know, maybe just pick one of those tools that we had looked at of the seven ways to spot those red flags and see how it works.
• 59:22
  Kary Shumway: And if you try it out, I hope you find it profitable.
• 59:26
  Kary Shumway: Thank you for listening to the Craft Brewery Financial Training Podcast, where we combine beer and numbers so that you can improve financial results in your brewery.
• 59:35
  Kary Shumway: For more resources, tools, guides, and online courses, visit Craft Brewery Financial Training.com.
• 59:42
  Kary Shumway: And don't forget to sign up for the world famous Craft Brewery Financial Training newsletter.
• 59:47
  Kary Shumway: Until next time, get out there and improve financial results in your brewery today!