7 Financial Red Flags That Predict Brewery Trouble

In this episode, we dig into how financial trouble usually shows up months before it becomes a crisis, and why so many owners and managers miss the warning signs. 

When you’re busy fighting daily fires, reviewing financials weeks after month-end, and unsure which numbers truly matter, problems stay invisible until cash runs tight .

We walk through the concept of a financial early-warning system and explain how profitable breweries shift from reactive panic to calm, data-driven decision-making. 

Instead of drowning in reports, they focus on a small set of leading indicators that flag issues early — while there’s still time to act. This isn’t about becoming a CPA - it’s about knowing where to look, how often to review, and what actions to take when numbers move out of range.

Key Takeaways

• Most brewery financial problems show up early — but only if you know which signals to watch
• A focused red-flag dashboard is more powerful than dozens of backward-looking reports
• Cash flow issues are usually operational problems in disguise
• Reviewing financial signals weekly creates faster, calmer course correction
• Stabilizing cash flow and margins must come before growth or optimization

Resources

Get the Brewery Profit Brief - tips tactics and strategies for a more profitable brewery

Ready to transform financial results in your beer business? Learn more about the Beer Business Finance Association, a network of owners and managers working together to build more profitable companies.

Chapters

• 0:00 Red Flags And Turnarounds Overview
• 0:44 Show Intro And Host Background
• 1:19 New Finance Network Announcement
• 2:00 Why Financial Trouble Hides In Plain Sight
• 5:25 Game Plan And Red Flag Framework
• 7:43 Red Flag 1: Net Income Declines
• 12:12 Red Flag 2: Negative Operating Cash Flow
• 15:26 Red Flag 3: Cash Flow Ratios Scorecard
• 20:32 Red Flag 4: Sales Down, Margins Erode
• 22:12 Red Flag 5: Weak Wholesale Margins
• 27:12 Red Flag 6: Financial Health Checkup
• 33:05 Red Flag 7: Taproom Retail Ratios
• 36:06 Find Root Causes, Not Symptoms
• 39:16 Stabilize First Turnaround Method
• 42:20 High-Impact Cash Flow Fixes
• 46:04 Build An Early Warning System
• 51:00 Key Takeaways And Next Steps
• 53:22 Massachusetts Training Fund Details
• 56:00 Closing And Resources

Transcript

Kary Shumway: 0:00

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. So we get into seven financial red flags that predict brewery trouble, how you can diagnose the root cause of these problems. We talk about the stabilized first turnaround framework, and I'll share high-impact fixes that restore cash flow fast. 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. So for now, please enjoy the audio version of our recent presentation on brewery financial red flags and turnarounds. 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. I'm your host, Kerry Shemoy, a CPA, CFO for a brewery, and a former CFO for a beer distributor. I've spent the last 20 years using finance to improve financial results in our beer business. Now I'm helping other craft breweries to do the same. Are you ready to take your brewery financial results to the next level? Okay, let's get started. Just a quick note, we'll be right back to the podcast. I want to let you know about a new network for beer industry professionals. It's called the Beer Business Finance Association. 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. So I'd love to tell you a little bit more about this. If you are interested in learning more, please email me, Carrie at Beer Business Finance.com. That's K A R Y at Beer Business Finance.com, or you can visit BBFassociation.org. That's BBFassociation.org to learn more. Welcome to our presentation on brewery financial red flags and turnarounds. I'm Carrie Shumloy, founder of Craft Brewery Financial Training, the Beer Business Finance Association. 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. Our financial statements are historical. They're backwards looking. So when we get these reports, it's showing us like what already happened. 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. So really the goal is how do we take that information? 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? 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? 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. 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? We'll talk about high-impact fixes that can restore cash flow fast, and then how do you build that early financial warning system? If you're in Massachusetts, I did want to let you know about the Massachusetts Workforce Training Fund. 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. In a nutshell, eligible Massachusetts breweries may receive up to 50% 50 to 100% reimbursement for the training through the Express program. So it can be a great way to really kickstart the year on your financial training programs. So if you want to learn more about that, you can go ahead and scan the QR code. 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. 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. 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. So let's define the problem. So fundamentally, financial trouble is invisible until it's urgent. 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. So this doesn't happen overnight, doesn't happen suddenly. You know, it really does happen over time. And the warning signs are there. We're just not necessarily always knowing where to look. 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. 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. It is difficult to know which numbers actually make a difference. Um, so I know how that feels. 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. So we need a system to really distill this down. Like what is actually the most important number to look at? What are the levers that I can pull to improve these? 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? Because that that's when we really know it's a problem, right? 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. You know, that's by then it's too late. 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? 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? So the solution is here is to really shift from just looking at the financials to really analyzing and monitoring these financial signals. What are they telling us? 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. We want to obviously try to move from reactive uh to responsive. 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. So here's our game plan. 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. So here are seven financial red flags to help us spot trouble early. 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. But the first red flag is looking at our historical financial statements and seeing what's going on. Do we have a decline in net operating income? Uh I find it super helpful to do this because it's kind of a 30,000-foot view to begin. 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. Where were we? How did we get to where we are today? The second red flag is looking at our negative or shrinking cash flow. 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? Maybe we do a quick assessment as what we have coming up, payroll and any big bills. But we really need a better, more forward-looking, uh deeper analysis of what's actually happening in cash flow. Uh, because we know it's happening, right? I mean, money's coming in, money's going out. 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. Uh, the third red flag, cash flow ratios are missing our target. So we're gonna start with looking at a cash flow statement, kind of what it's telling us. And then we're gonna break this into really tangible, approachable cash flow ratios that you can look at on a regular basis. What are these ratios? How do they work? Again, what levers could you pull to improve them? The fourth red flag, sales decline, margin erosion. You know, this is the one I think we feel most profoundly these days when sales are tough to come by. So we're flat or we're down a little, we're if we're if we're up, we feel great. But what's happening to those margins? Sometimes those really take a hit. 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. And what are the benchmarks? Where should where should you be at? How are you measuring it now? Do you really have the full handle on your cost of goods sold? So we'll dig into that. The sixth red flag, failing a financial health checkup. 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. 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. And the seventh area we'll look at are these key retail ratios if they're getting off target. 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. So we want to watch some ratios to make sure that we are maximizing our margins and profitability. So the first red flag here is to watch for declines in your net operating income. So there's different terms for this. You could say profit, bottom line. I use just net operating income here in place of you know just saying profitability. 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. 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. So sales and cost of goods, margins, operating expenses, and net income. Just five lines on here. Very simple. I think this is an important point to underscore is if it's simple, we're actually going to look at it. We might we have a fighting chance to understand what it's telling us. 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. So I would encourage you to just run a summarized look at this. You can always run the details after, but start this way. So that's step one. Summarize it, and then let's look back, say three years. 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. It shows you some trends. So we can just see our top line sales are growing. 525 in year one, 675, 7%. So we're like, all right, that's good. And then we look at our margins, and I look to look, the dollars can kind of be hard to okay. The margins are up, they're down. I like to look at those, but I start with the margin percentage. Like, what's it doing? Is it the same? Is it flat? Is it going down? So in this case, year one margins were 75%, then they dipped down to 60% in year two, and then 49% in year three. So we're like, all right, well, what's going on? Now, if you're looking at this, you're thinking, well, what is going on? Maybe this brewery decided to go heavy into wholesale. 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. Sales have grown quite a bit, uh, but margins have eroded. And then I look and I say, wow, let's look at the dollars. 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. We actually lost margin. We lost a lot of margin percent, we lost margin dollars. That's that's a red flag for sure. And then we look at the operating expenses, what's going on there? Now, as a percentage of sales, they're fairly static. 60% operating expense in year one as a percentage of sales, and then 63% and 61%. 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. Then it went up to$425,000 that's$100,000, then it went up to$442. So our operating expenses have gone up over$100,000 while our margin has shrunk about$35,000 or$40,000. So that something's going the wrong way here. Now, as I'm saying this, you might be thinking, well, this is kind of obvious. I mean, you'd know this right away, but a lot of times we run this and we forget. You know, we forget what we did two or three years ago. Uh, and we're not always looking at the trends or, you know, kind of the slide if you sort of feel it. We're like, God, you know, cash is tough, but sales are growing, so I feel good about this, and we can fool ourselves. And then we look at the net income, and we can see in year one, not a bad business. You know, we had a 15% profit to the bottom line, making$78,000 of net income. Looks good. Year two, boy, it really changed. 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. So, what does this tell us? 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. So, this can just kind of show us where we need to focus. So, that's red flag number one. It's are you seeing a decline in your net operating income? 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. 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. Uh so the spreadsheet can be helpful for that. But I find this super helpful just in terms of I think again, setting the context, like what's happened in our business, right? Where where were we two, three, four, five years ago? Where are we now? How do we get here? 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? And what can I do to get back to that? So if we look at year one, we're like, boy, times were pretty good back then. How do we get back to that? 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? So that's the first red flag decline in net operating income. The second is negative cash flow. Now, of the three financial statements, the cash flow statement probably gets the least amount of attention. 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. Um so what we want to look at here, there's different forms and formats of cash flow statements. We have the direct method, we have the indirect method, we have the reports QuickBooks can run or can't run. Uh, but ultimately, this method here is showing us whether our business is producing enough cash flows to sustain itself. So this cash flow statement breaks it into operating activities, investing activities, and financing activities. Now, operating activities basically means what are the cash flows from your core operations? You know, we make beer, we sell beer, are we making money doing this? Investing activities are going to be things that we're literally investing in the business. Are we buying new equipment? Are we updating the taproom? Are we selling old equipment? 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? Where is that coming from? So it might be coming from a new loan, loan proceeds, owner investment, um, things of that nature. And then where is the money going relative to those financing activities? Loan payment, uh loan principal payments, for example, or maybe there's an owner draw, uh, distributions to owner. So those are financing activities. 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. 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? And in this case, the answer is no. So then you're like, well, how come we didn't run out of cash? It's well, we borrowed, it looks like we borrowed money. That's where financing activity says, yeah, the owner put in 10 grand and we we took a new loan of 50 grand. Now we did buy some tanks and whatnot, but that's why we're cash positive, at least at this point. Because again, we'll typically look at you know cash over the course of time, and if it goes up, we feel good. If it goes down, we get worried. You know, in this case, beginning cash of 20 grand, ending cash of 32, cash went up. So our instinct might be, well, cash is up, I guess we're okay. But then when you break it down like this, you can say, hmm, this isn't sustainable. You know, we've got a net operating cash deficit, and you can see where it's coming from. So, red flag number two, negative cash flow, in particular, negative operating cash flow. So I'd encourage you to figure out how to run a cash flow report as part of your monthly reporting. 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. Next, number three for red flags is setting up a scorecard for your cash flow ratios. Now, there's lots of different ratios we could look at. I'll focus on maybe three or four here. 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. Those those typically get you most of the way there. 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? So for example, accounts receivable, you might not have accounts receivable. If you just tap remone only everybody's credit card and cash, it's just not a thing. You don't need to worry about it. 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. 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. It's wacky. But so if you've got receivables, we really need to watch those. 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? So with receivables, these are just uncollected sales. So let's say we're in wholesale, you know, let's maybe we're even self-distributing. That can be particularly tough for on accounts receivable, um, trying to track down all those retailers to get them to pay. Um, but what we first want to look at is what's the goal for days' sales outstanding? So that's going to be the ratio we want to watch. Day's sales outstanding. It's really just a measurement of how efficiently we're managing and collecting on our receivable. So if we say a day's sales outstanding is 25, that basically means we have 25 days worth of sales sitting uncollected. And then what's our that's that's our goal, 25 days. And then what are our actual days outstanding of 35? So right away we can say, well, we've got our days actually outstanding are 35. That's higher than my goal of 25. Uh I gotta take a closer look at this. The other way to look at receivables is we run those account receivable aging reports, you know, 0 to 15, 0 to 30. 30, 30 to 60, you've seen these things. And it's pretty evident who's overdue and and whatnot. But a day's sales outstanding ratio can quickly show you how you're doing relative to your goal. Now, a lot of these are going to be dependent on what your credit terms are. So in this example, credit terms might be say 30 days. So we got to be below 30 days. 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. So measuring that, the other way, other thing to measure is the obvious. 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. So the best way to improve those is to have a good credit management policy and to be actively managing this. 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. And so it's it's helpful to have a good cash system to track those down. The other cash flow ratio that's that's applicable to pretty much every brewery is the inventory. So the ratio, the key metrics that we want to look at here, days on hand. That's basically like how much how many days worth of sales on hand do I have right now in inventory? How long could I sell this before I run out? And how do I set a goal for what is the right amount of inventory? Because that's the fundamental question that this ratio is answering is like, what's the right amount of inventory? 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. We want just the right amount. So how do we figure that out? Well, we can measure it. We can say, like, what is our goal based on how quickly we can replenish that inventory? 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. So if that's our goal, 14 days on hand, and maybe it's 50, maybe it's 20. So you have to evaluate your circumstance. 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. That's a lot of cash. So now we gotta dig in. All right, well, what's on hand right now? Do we have slow moving items? Um, do we have sales that you know are just about to go through and that number is gonna come down? You know, what's what's the situation here? So, really the red flag, days on hand significantly higher than our days on hand goal. Accounts payable, this is just money that we owe suppliers and vendors that we haven't paid yet. Setting a goal here, days payable outstanding, which is really how efficiently we're managing our payment process around accounts payable. You know, when we want to pay on time or right around there, but not too early. So when we measure this, setting a goal that usually correlates to the vendor credit terms, and then comparing against that goal. 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. And in this case, we're at 21 days. So we're for some reason we're paying too quickly. 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. But this will at least flag you to say, hey, it looks like we're paying too quickly. Let's let's take a peek at this. So those are just three of them again. Inventory, these are important cash flow levers. 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. What are my targets? Where am I actually? And then the next is what levers can we pull? 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? You know, what's going on? And accounts payable is really scrutinizing your payable process. 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? So we have this simple three-step system where every purchase has to come with a purchase order to control the spend. Then we need a receiving document that matches up, hey, what did we physically receive? Does that match the purchase order? Is there any damage or breakage or you know, shortages or misshipments? And then lastly is the invoice. Does that match up with those other two documents? Did we the invoice does that have the proper pricing and units that we actually agreed to when we placed the purchase order? 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. Number four, sales decline, margin erosion. 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. Typically, when I'm doing this, I'm looking at 12 to 24 months, 12 to 18 months, something like this. 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? So in this example, you know, we've got January through December with sales, cogs, and margin. In January, our margin's at 60%, then it's at 58% in February, then 58.5 in March, looking okay. 57 now in April. Now I'm like, okay, we're starting to decline, then 56 in May, 56.4, 56.2, 53.9. So the decline is pretty steady. Now, sometimes you'll see a lot of volatility. One month is good, one month is bad, and then that repeats. That can be an indicator of other red flags, most likely inventory, inventory valuation, your counts are off. There could be some errors in purchasing activity, but looking at the margin does a couple things. 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. So we really have to start with that as a baseline. Like what is our expectation? 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. 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. 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. 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. 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? What's going on uh with margin and what what does that percentage look like? So the fifth red flag, wholesale margins are below benchmarks. 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. 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. 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. 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. 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. That could be a little tricky. But if you got some, you know, top two, three, five, just to do the exercise. So you start with your best-selling brand, the different packages that you sell it in, and then we're gonna aggregate some information. First, we're gonna figure out let's do the easy stuff first. What is the price to wholesaler, the PTW? So if you're selling to wholesaler, uh if you're self-distributing, you just change it to you know price to retailer. But in this example, brand number one, half barrel, six barrels, and so forth, here's our PTW, our price to wholesale. We list that out. Next, and what's usually the next easiest is what is our what are our material cost to goods sold? 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. They do a pretty good job of that. So that's that's the next input. Now, labor cost of goods and overhead costs. This is where most folks get tripped up. Like, how do we how do we do that? Um, so there are ways to do it. Uh the simplest way is simply aggregate those pools of costs and divide it by um total barrels sold. And then you can push that down pro rata based on your you know different types of packages. 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? That will give you a labor cost of goods per barrel. And then you just do the math to say, well, one barrel has labor costs of say$50 per barrel. A half barrel is half of that, so it's$25 and so forth. So you're really allocating it just based on the liquid. It's not perfect, uh, but at least give you kind of a directionally uh correct way to kind of look at this. Do the same thing with overhead. So overhead, the this gets confusing too, because we're like, what goes in there? 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? Um, so anything that you couldn't make your beer without that cost, then it goes in cost of goods. 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. It's usually going to be occupancy, um, utilities, insurance, depreciation. 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. 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. 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. Now, here again, we want to have some targets. What should my target be? You know, generally speaking, 40 to 45% is what you're shooting for at wholesale. 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. Sometimes it's just the market, you know. Sometimes you're gonna have packages that are lower. The name of the game is to get a blended gross margin in that 40 to 45% range. So you have to start with looking at your financials and running. 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. 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. Uh so it gets we need to separate those out. So step one, separate them out so you can see what your wholesale margins are compared to the benchmarks where you need to be. 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. So that could be a big red flag. And in this case, I would say that it is. If we've got 15% margins on a package, we got to dig in. What can we do? Can we do anything with pricing? What are the costs that are in here? Can we do anything uh with those costs of goods sold? Can we drive can we drop this SKU altogether? 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. Okay, so failing the financial health checkup is uh red flag number six. So here I have uh four ratios for you to look at. So we've got our current ratio, debt to equity, inventory turnover, and a debt service coverage ratio. So each of these ratios is gonna do something a little bit different. Um the current ratio is gonna measure our liquidity. Basically, can we pay our bills on time? So a lower rate here might indicate that you know we've got tight cash flow. A higher rate might mean that we've got idle assets. 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. Um, so if you run your balance sheet, typically these will be subtotals on there, the current assets section, current liability section. So you should be able to find it. 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. 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. The next part of our financial health checkup, the debt to equity ratio. This is a big one. It's a leverage ratio. Really, how well are we using debt? Are we borrowing too much? Uh, can we cover our debts? So here we're looking at total long-term liabilities divided by total equity. And what we're looking at here is somewhere around one, say one to two times uh for a result. So basically, liabilities and equity are about the same, or on the high side, liabilities are about twice as big as equity. 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. So again, that's kind of on the high side. 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. It's a you're you're in a deficit position. Uh so there right away that debt to equity ratio is gonna kind of get blown up. 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. Next, inventory turnover. We talked about this in um our cash flow ratios, and I use the term days on hand to measure your inventory. I just particularly like that one. 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. So it's really really are we managing our total inventory portfolio efficiently, or are we tying up cash in slow-moving items? 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. 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. And typically four to eight times is kind of a healthy range. Obviously, higher is better. The last ratio to look at on your financial health checkup is debt service coverage ratio. So it's gonna show your cash flow strength, how well you're able to cover your debt payments. So here we're looking at this term called EBITDA. This is a simpler way to say net operating income. So it's earnings before interest, taxes, depreciation, and amortization. And we're gonna divide that by our principal and interest payments. What are you paying each month, each year? And what we're looking at is for your EBITDA to be bigger than the amount that you're gonna be paying out. So in this case, a healthy target range is somewhere north of 1.2, 1.3. Many banks I want it you know, more like 1.5. So it's really just can the brewery generate enough cash to cover the loan payments? And if you're under one, clearly that's a danger sign. 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. So run these, try these, see if they're helpful for you. Um, as you can see, these are very balance sheet heavy. 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? Net operating income. You know, this is really looking at it more from a perspective of, you know, what are your assets and liabilities look like? What are your liabilities compared to your equity and things like that. So I think this could be a helpful way to just take an assessment of and possibly identify some red flags for your business. 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. So this is just an example of what your scorecard might look like. Uh so it's taking current ratio, kind of showing you the math and the target, debt to equity and so forth. 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. So this can be a handy little scorecard. It does it shouldn't take long to fill these out. That's the thing, too, is you know, we don't want to spend a ton of time just you know building spreadsheets. We want stuff that's gonna give you good visibility into what's happening so that you can spot these red flags early. Okay, our seventh uh check here for red flags, key retail ratios being off target. So, what are the retail ratios? You're probably tracking some of these now. These are pretty standard. 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. So you if you've got food, you know, you're probably measuring these prime costs. 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. We're not shooting necessarily for anything. We might be comparing it to the prior year, uh, we might be just looking at it. But the goal is like, where are we? What's the target? What's the gap? What are the action items we're gonna take to close the gap? Repeat. So in this case, front of house labor is a percentage of sales, we've established a target, 15 to 25 percent. Let's be specific. Let's say our target's 20, then we're running our numbers. You can do this every day, every week. You know, I kind of like that cadence because we're constantly looking, particularly if it's a problem. So we've set a target. Now, where do you get your cart your target? So these 15 to 25 percent is typically what I'll see. You know, it really depends on a lot of factors, but you need to pull a number out as an average. I I we typically will start with 20%. 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. Like, well, where have you been? What was labor as a percentage of sales? Look at it on a monthly basis. Do you see fluctuations in there? Is it you have some months that are really good? Do you have some months that are actually quite a bit higher? 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. So you gotta kind of look back, and the goal is better as you're setting these targets. So if you run your numbers and you're like, wow, we're running more like 28 to 30 percent, okay. You know, then maybe your target's 25. How do we get to 25? What let's look at the details. Uh, but the first step is know what your numbers are, set a target, identify gaps, work to close the gaps, repeat. Back of house labor, same idea. What's the target? You know, if you look at all sorts of industry data, your target's probably around 30%. So, what's your target? You need to look at that, you know, for yourself. Food costs as a percentage of sales, obviously an important item to track, as you know. If you sell food, those margins are quite a bit tighter than on your beer. So setting up a tracker for this too. What are your food costs as a percentage of sales historically? Run it by month, see if there's again dips and spikes, and then dig in on those. 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%. You know, what's happening during those times? So the red flags are going to be when we start deviating from front of house, back of house labor. And our food costs compared to our targets. Most of your point of sale systems that you're using can can generate this data for you. 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. Okay, so those are our seven red flags. 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. So once you've figured out the red flag, the next is like what's causing this? What is the actual root cause of this? And I often think about inventory. Um, so say one of our red flags is tracking inventory, constantly doing the count but never being right. We have variances all the time. Like, why is this happening? What's going on? 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. So we don't have enough time to analyze it. 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. So for inventory, we might think about what are the different things going on. So with inventory, we're receiving it. So we could have a breakdown there. 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? Uh maybe we're we're shipping, we're picking, we're packing, we're shipping. Did we double check that what we physically picked matched the order that we were supposed to pick it, be picking? You know, do we have double checks in place for that? Things happen, you know, mistakes happen. So these are all ways an inventory can get off. Do we record breakage? Stuff breaks. What's the system for you know recording that? 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. 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. 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. So, what are the processes for those things? So every financial red flag has an operational root cause. We just need to figure it out. So, some other examples, declining margins. We talked about that. You know, maybe that's pricing errors. You know, maybe we just haven't evaluated uh what our price for our brands and our products should be well enough. So we we can't see that until we pull together the costs, look at the margins as as a whole. Negative cash flow might stem from those two cash drivers we talked about. Too much inventory, too much receivables. You know, what do we do about it? 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. So the negative cash flow can come from that. Just the root causes. We need a cash management system. Labor cost spikes, these can tell us about scheduling inefficiencies. You know, I think we generally do pretty good at this. 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. 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. Uh, and whenever we run this, we do see a lot of volatility from month to month. 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. 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. 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. You know, cash might be like we are gonna run out of cash. So, talk about this concept of stabilize first turnaround method. Uh, so save the patient first. So stop the bleeding. What does this mean? Cut discretionary spending. We've got to identify what that discretionary spending is. You might want to pause any projects, any non-essential projects that have been working on worked on. One of the quickest ways that we can help out our cash flow is to renegotiate payment terms with vendors, sometimes lenders. Um, so digging in on those areas, how can we stop the bleeding if we're in that situation right now? 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. Um, we have so much data, but we're not sure to look at. So implementing a daily cash tracking sheet, weekly financial scorecards, regular updates of the forecast, super important. So we'll know where we stand at all times, and furthermore, where we're going. 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. And the in the third phase is to fix core operations. So again, root cause operational issues could be pricing, labor efficiency, inventory management, accounts receivable management. The hard part is if we go through this and we identify, boy, there's like a lot we need to fix. You got to do it one at a time because it's just gonna become overwhelming. So we can think about these monthly focus items. So maybe, you know, month one, hey, we're gonna focus on pricing. We gotta, that's our quickest way to improve margins and profitability. So this month coming up, it's pricing month. Next, it's inventory management. We gotta figure this out. It's always off, we're always running out or have too much. So maybe that month two is inventory management, and so forth. And you just kind of just like any big problem, you break it down into smaller pieces. All right, here are a handful of high impact fixes for cash flow. Now I'll say this is just three. There are so many, there are so many cool ways to find new fixes. 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. 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? Um, but you can look that up workshop or playbook to learn more about it. But it's just a cool way to brainstorm and get a lot of input and great ideas. So here are three ways strategic price adjustments. I think we all know that raising prices, if we can, uh is the quickest way to get that margin profit impact. It's immediate and can be significant. Taproom revenue boosts. So we have lots of opportunities to sell to our customers, but we have to ask. So this requires a little bit of training. We use the word upsell training. Um, we can also gear our customers towards higher margin food items. We call this menu engineering. Uh, we can really focus on merchandising. There's so many opportunities. When someone walks into your really the goal is give them things to buy, they're there to buy. They're there because they love your beer, or they love the vibe, and they want to check it out. So give them opportunities, make it easy. Here we also hear about this concept of frictionless buying or frictionless selling. You know, make it easy for the customer to buy from you. 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? I can't find it. Or it's way in the corner and there's a big crowd, or I'm not going over there. Merch, man, I'd really like to buy a hat or a t-shirt. Where's the merch? You know, they don't, it's hard to get to. So just think about that from a perspective of a customer. How can you make it easier for your customer to buy from you? 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. That's these are all fine, but you know, how do we reimagine that? How do we reimagine it so that we get recurring revenue? So that we get recurring customer visits. You know, maybe that revenue's coming in monthly or quarterly instead of just one shot at the end of the year. That can really smooth out seasonality if you can build up these loyalty programs. There's so many cool things you can do with these. 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. 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? So think about that. 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. What about food? You know, what if you had, you know, and what about bringing in different customers too? What about the whole family? Family, it's family pizza night. You know, it's loyal locals. You've got people that live around you. How do you get them to come back more often? They're already coming in maybe once a week, once every other week. How do you get them to come in, I don't know, twice a week? Set up a loyalty program, give them a reason to come back in. And they usually don't come alone. You know, they'll bring a friend or a couple friends, and there you go. So we're driving more. So I'd really encourage you to check out and think about those loyalty programs. 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. And then you can have other tiers. 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. That's like the worst thing you can do. 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. So the glue that holds this whole thing together is to build a financial early warning system. And really what that means is you need to have a good financial cadence in your business. So, in my experience, the best way to do this is to hold these weekly financial huddles. 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. 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? You know, if we think about inventory days on hand, where are we at? What's the goal, the target? And then if we're we have a gap, how are we gonna close it? You can do the same with you know your sales goals, your daily, weekly sales goals. Where should we be? Uh, what's the target, or where are we, what's the target, and what's the gap. And then importantly, is what are we gonna do to close that gap? 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. Um so it's a bit about uh communication and accountability too. 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. 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. And it's also you know a place to help each other. So if we've got um you know ownership of these numbers, we've got everybody looking at them. It's an opportunity to support each other as well. 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. 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. So there has to be an element of discipline so that these meetings get the results you want. You don't want just, oh, we're just gonna have one more meeting. You know, the goal is ownership of the numbers. 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. And that's how you can think about building that early warning system in your business. So the big takeaway here is that these financial turnarounds, they're really not about like one big move or one heroic move. They're really about discipline, consistency, and identifying red flags earlier so that you can do something about them. 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? So those weekly financial huddles are the best way to accomplish that. All right, so that is what I've got for you today. 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. 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. Super important these days. And if your brewery is eligible, you'll receive between 50 and 100% reimbursement for the training program. Uh so I can show you how that works. 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. See if there's anything I can do to help you out. So here's my contact information. Easiest way to get in touch again, Carrie at beerbusinessfinance.com. So I know your time is valuable and I hope you found some value here in this presentation. Encourage you to check out, try some of these out for yourself. 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. And if you try it out, I hope you find it profitable. 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. For more resources, tools, guides, and online courses, visit Craft Brewery Financial Training.com. And don't forget to sign up for the world famous Craft Brewery Financial Training newsletter. Until next time, get out there and improve financial results in your brewery today!