“If you can’t convince them, confuse them.” -Harry S. Truman
I believe that taking the time to understand the financial performance of your brewery is one of the best investments you can make in yourself and your business.
The numbers tell us whether the business is operating profitably with good cash flow, or if there are dire problems that need to be addressed and corrected.
Unfortunately, many brewery owners and managers don’t fully understand the financial statements of the company. It’s not your fault. The accountants have made this information overly complicated, and unintelligible to the folks who need it most – folks like you.
So let’s start with some basic terminology – what is the difference between cash and accrual accounting?
Cash accounting simply means that transactions are recorded when cash is affected. If cash is paid out for an invoice, the transaction is recorded. If cash is received in from a customer, the transaction is recorded. Pretty straight-forward. Very similar to how your personal checkbook register might look.
Accrual accounting, on the other hand, means that transactions are recorded when revenue is earned and expenses are incurred. Accrual accounting doesn’t care if there’s any cash involved. Accrual accounting only cares whether revenue is earned and expenses are incurred.
An example: You place a purchase order for $5,000 worth of hops to be delivered in a few months. Cash accounting doesn’t care. No cash, nothing gets recorded. Accrual accounting does care, and says you have incurred the expense and it needs to be recorded.
Another example: You make a $1,000 sale to a customer, and they’re going to pay you in 30 days. Again, cash accounting doesn’t care. No cash, nothing gets recorded. Accrual accounting says that you need to record the sale. You earned revenue, you record the transaction.
I apologize on behalf of my fellow bean counters. They had good intentions, but they’ve hijacked the numbers, and buried the good information in debits and credits, accruals and recurring journal entries. It’s time to change that and give you back the power that is rightfully yours – the power to read, understand and act upon the financial information. The power to transform your business, the power to profit.
Craft Brewery Finance is dedicated to providing simple, powerful, common sense financial guidance to help drive your business. No mumbo jumbo, just common sense tips, tactics and strategies to help you improve financial results.