According to the Brewer’s Association, hundreds of breweries close their doors each year.
Why does it happen? What is the leading cause of failure?
And most importantly, how can you avoid a similar fate?
Bart Watson, chief economist for the BA says that some of the reasons for brewery failures is increased competition, rent and landlord issues.
The truth is, there are probably a million different reasons.
However, the #1 reason why craft breweries fail is that they run out of cash.
Cash is king. Cash is the fuel that keeps the business running. Run out of cash and you’re done.
So, how do you avoid running out of cash? For starters, get a laser focus on the 5 Cash Flow Drivers.
The 5 Drivers of Brewery Cash Flow
In the beer business, there are five primary areas that affect cash and cash flow. Ignore one or more at your own peril:
- Accounts receivable
- Accounts payable
- Capital expenses
- Operating performance (profit)
Accounts receivable is money owed to you by your customers (wholesalers, retail accounts, etc.). It’s un-collected cash. When sales go up, so does A/R. This can be a nasty surprise for growth breweries – sales go up, but the cash collections lag behind.
Inventory includes raw materials (hops, malt), packaging materials and finished goods, among other things. Again, as sales go up, so does inventory. Inventory is cash sitting in your brewery or in a warehouse somewhere offsite. That inventory needs to be paid for in dollars – that’s more cash out the door.
Accounts payable is money you owe to your suppliers. The longer you can stretch your payment terms the longer you can hold onto your cash. No one wants to be a deadbeat and not pay the bills, but paying early can be deadly for your bank account.
Capital expenses are things like brewery equipment, tanks, and kegs. Even if you borrow money to pay for these items you’ll have to put down a certain amount of your own cash (usually 20% to 30% of the purchase price). And don’t forget, you have to pay back what you’ve borrowed, with interest. Another hit to our friend cash.
Operating performance, otherwise known as profit or loss is the difference between income and expense. Income (sales) minus expenses = profit or loss. You can show a profit for a period of time and have no cash. Likewise, you can show a loss for a period of time and have plenty of cash. It doesn’t seem to make sense, but it’s the math truth. However, over a longer period time, you need to be profitable to make sure you don’t run out of cash. But you already knew that.
The #1 reason why breweries fail is that they run out of cash. Want to avoid a similar fate? Monitor these 5 Cash Flow Drivers on a regular basis (at least monthly), and watch over your cash like a hawk.