How to gain confidence in your brewery financial numbers

During a seminar at the craft brewers conference, the moderator asked the room a simple question: “How many of you are confident that you get good financial information?”

Less than half the hands in the room went up.

As a CFO for a brewery, the response worried me. Are there really this many brewery owners and operators that don’t have confidence in their financial statements?

Something needs to be done.

In this post, I’ll review the process I use to create reliable, timely and actionable financial information. The process will help ensure your financials are accurate and restore confidence in your brewery numbers.

The Goal of Financial Information

The income statement, balance sheet and statement of cash flows measure and report the financial results of your brewery.

These are the financial numbers that you must have confidence in.

The income statement measures beer sales, cost of sales, margins, operating expenses and net income  (or loss). This statement answers the question, “did we have a profit last month?”

The balance sheet measures assets, liabilities and equity. Assets are what you own, liabilities are what you owe, and equity is the difference between the two.

The balance sheet measures the financial health of the brewery. And wonderfully, the balance sheet measures the accumulation of all profits and losses since the inception of the business.

The cash flow statement measures the in-flow and out-flow of cash. Unlike the income statement which measures transactions, the cash flow statement reports on the movement of actual cash. Surprisingly to many business owners, there is often a big difference between profit and cash flow.

The goal of these financial statements is two-fold:

  1. Provide information so that you can make better decisions
  2. Provide information to show where to stand compared to financial goals

Without good, reliable and timely financial information it’s difficult to make informed decisions about your brewery. Moreover, without confidence in your financial reporting, you don’t know if you’re meeting your financial objectives, or just falling short.

With so many breweries using debt to finance their business, it is essential to understand whether you are on track with your financial goals. Your bank will insist on it, and so should you.

Follow this Process to Create Reliable Financial Information

To produce dependable financial statements and gain confidence in your numbers, use this two-step process:

  1. Review the General Ledger Detail
  2. Read, Review and Reconcile the Balance Sheet

Don’t panic. This two-step process may sound unpleasant, but it’s quick, easy and will create confidence in your financial information.

Review the Brewery General Ledger

General ledger accounts are a detailed listing of all the things you track and measure in the brewery. The purpose of the general ledger is to provide organization and structure for your financial reporting.

Within the general ledger lives the transaction detail. Here is recorded every transaction that your brewery makes that affects the numbers. Details of every sale, every raw ingredient cost, every paycheck written and every utility bill. This is where the good stuff lives.

On a regular basis, open up the general ledger detail and review the information that is posted here. My process is to run the detailed report once a month, pour myself a pint of beer, and get down to business.

First, I scan the details in the cash accounts, accounts receivable and inventory accounts. Next, I move along to the fixed assets, accounts payable, and loans. I’m looking for unusual transactions – a large deduction or a payment to an unfamiliar vendor, for example. Mostly, I’m just getting familiar with the types of transactions that are flowing through the brewery.

The first few times you review the general ledger detail, the information may feel dense or overwhelming. Stay with it. Over time, you’ll become more familiar with the patterns that emerge and learn to recognize when a transaction doesn’t feel right.

The more you review your general ledger detail (the nuts and bolts of your financial reporting) the more confident you will become with your numbers.

And don’t forget to pour that beer while reading the reports. I love numbers, but they go down easier with a pint or two of the frosty stuff.

Read, Review and Reconcile the Brewery Balance Sheet

In school we learned about the “Three R’s”, Reading, Riting and Rithmatic.  To gain confidence in your financial information use these “Three R’s” instead: Read, Review and Reconcile your balance sheet.

In my experience, I’ve found that the balance sheet is the forgotten financial statement. Most folks don’t pay it much attention. The income statement gets all the love, what with its fancy sales and profits. However, the balance sheet holds the key to accurate financial information.

The first step in this process is to simply read your balance sheet. Just print a copy and read it. Get a sense for how the balance sheet is organized – assets first, followed by liabilities, then equity. Eyeball the accounts that live under each section – cash, accounts receivable and inventory in the assets section, for example.

Next, it’s time to review and reconcile the balance sheet accounts. Don’t be scared off by the word reconcile. This is just a fancy way of saying, “let’s make sure the numbers are right.”

The process to review and reconcile your balance sheet works like this:

#1 Review the Balance Sheet. First, print the balance sheet and review the accounts. Look for obvious errors (assets that don’t exist anymore, inventory that has long ago been disposed of, or accounts payable amounts that have already been paid). Clean up any mistakes and move on to step two.

#2 Reconcile the Balance Sheet. Next, for each balance sheet account determine how you’ll know if the amount is correct. For example, the cash amount listed on the balance sheet should agree with the reconciled bank statement, the inventory amount should agree to the detailed inventory listing, and the accounts receivable balance should agree to the detailed A/R report. The bean counters call these things supporting documents. They support the numbers on the balance sheet and make sure the numbers are correct.

Repeat this process for each number on your balance sheet until you have reconciled all the numbers. You may find errors and misstatements that need to be corrected. Once identified and cleaned up, you’ll be one step closer to feeling confident in your financial information.

Wrap Up + Action Items

The purpose of financial information is to make better decisions so that you can improve financial results in your brewery and know where you stand on your goals.

Review your general ledger detail and understand the financial transactions that flow through your brewery. Follow the balance sheet process outlined above to identify and correct errors in your numbers.

Share this article with a brewery friend or two. If you do, then maybe next year at CBC when the question is asked, “How many of you are confident that you get good financial information?” every hand in the joint will go up.