“I believe that through knowledge and discipline, financial peace is possible for all of us.” -Dave Ramsey
Brewery owners and managers must learn to read and understand the financial statements. It’s the only way to know what’s going on financially in the business.
With this knowledge you can identify and fix problems that are costing you money, and see opportunities to increase net income and put more cash in the bank account.
The good news is that learning to read your financial statements is not difficult. My job is to simplify this information so that you can get to work making more money in your brewery.
In the previous article we simplified the general ledger. The general ledger accounts are a detailed listing of all the things you want to track and measure in your business.The purpose of the general ledger accounts are to provide organization and structure for your financial reporting.If there’s something in your brewery you want to measure, you should have a general ledger account to track it.
In this article, we’ll simplify financial reporting for your craft brewery. The goal is to help you understand how your brewery finances work so that you can gain control, understand the results of the business and improve financial performance.
Craft Brewery Finances: Financial Reporting
- Financial reporting simplified
- The Big Three: Income statement, balance sheet, cash flows
- How to create a book of simple financial reports to track your brewery results
Financial Reporting Simplified
Financial reporting is the process of producing statements that show the brewery’s financial status to owners, management, investors and the government.Yes, Uncle Sam is very interested in your financial results as well.
The main objective of financial reporting is to provide useful information for decision making. For example, the reports show whether the brewery is making a profit. The reports also provide information on whether there’s enough cash or borrowing ability to invest in new brewery equipment.
The building blocks of the financial reports are the general ledger accounts.
The general ledger accounts represent the detailed listing of the items you want to track in your brewery. The financial reports summarize this listing into different forms known as the income statement, balance sheet and statement of cash flows. These are the BIg Three of Financial Reporting.
The Big Three Financial Reports
The income statement, balance sheet and statement of cash flows make up the traditional financial statements. Taken together, the information on these reports present brewery profitability, brewery equity or relative health of the business, and most important, the brewery cash flows.
All of the reports are needed to get a complete view of brewery financial operations.
The income statement, is also known as the P&L (for profit and loss statement). It tracks company revenue, gross profit, and expenses.
The P&L shows us the all-important bottom line – whether we had a profit or a loss. This is the report everyone wants to see each month.
The balance sheet records brewery assets, liabilities and equity. Assets are things the company owns, liabilities are what the company owes, and equity is the difference between the two.
The cash flow statement is like your checkbook – it shows money in and money out. While the income statement measures transactions, the cash flow statement measures the inflow and outflow of cash.
Profit and cash flow are two very different things. I’ve heard more than one brewery owner exclaim, “my income statement says I made $50,000 last month, so how come I only have $500 in the bank?”
The income statement provides great information, but it’s even better when combined with the cash flow statement.
How to Create a Book of Simple Financial Reports
It’s useful to have a big picture understanding of financial reporting, and a working knowledge of what each financial statement tells you. However, this stuff makes a lot more sense when you apply it to the numbers in your own brewery.
My recommendation to owners and managers is to keep the financial reporting as simple as possible to start. This way, you’ll get the information you want, without being overwhelmed by too many numbers.
Simple financial reports are summarized financial reports. The reports show totals instead of lots of detailed numbers. They also present the numbers using metrics or ratios which make the information easier to digest.
Here is a Template set of Simple Financials: a summarized income statement, balance sheet and cash flow statement. I’ve included some ‘cheat sheet’ notes on each of the tabs to help you follow along and give you pointers to create your own simple financials.
Download the sheet and take a stab at plugging in the numbers from your brewery.
Keys to creating a simple book of financial reports for your brewery:
- Use summarized information instead of pages and pages of details
- Use metrics and ratios to simplify the information
- Organize and present the reports in a way that is meaningful to you. For example, if you want to see revenue/barrel or net income/barrel, put that right on the report where you can easily see it.
Wrap Up + Action Items
Financial reporting is the process of creating statements that show the brewery’s financial status to owners, management, investors and the government.
The purpose of financial reporting is to provide useful information for decision making. Understand what the financials tell you, and make better decisions with the information.
Start with a review your financial statements: income statement, balance sheet and statement of cash flows. Spend some quality time with these reports and get to know them.Ask some basic questions –
- What is brewery net income for the month and year to date?
- What are total brewery assets?
- What is brewery cash flow for the year?
Ask some more detailed questions:
- What is brewery net income on each barrel of beer?
- Do we track net income for our different revenue sources (tap room, self-distribution, sales to wholesalers)?
- How do brewery results compare to industry averages?
The financial reports should provide you with answers to these questions, and any other information that you feel is important to run your brewery. There is no end to the type of financial reporting you can create. However, start with simple, summarized financial reporting. You’ll be simply amazed at the results.