The Brewery CFO Pre-Workshop Questions
2017 Brewery Accelerator Workshop, San Diego CA
Taxes and Compliance Questions
Taxes and anticipation of what will be taxed
That is a loaded question. It will depend on where you live. Taxation follows governance, and almost every governing body can level a tax. Generally, there are Federal Taxes (excise and income), State Taxes (income, sales AND USE, and sometimes excise) and Local Taxes (property, sales AND USE and sometimes income or licensing). You can’t get rid of state and local taxes, but the big question is what to do with the income. Most breweries incorporate using a “pass-through” tax structure. That means that the income of the brewery will flow through to the owner’s returns. You save on double-taxation, but you add a level of complexity to the owner’s personal returns that needs to be understood.
What is the appropriate depreciation on brewery equipment?
I like to look at book depreciation when reviewing financial statements. It provides a fairer reflection of the balance sheet (if you believe that stainless has only a 7-year life), but it is better than tax depreciation (which uses accelerated depreciation). That being said, I’m seeing more and more income statements move depreciation and amortization to the other expense section of the income statement. That will give you a true “income from operations” before the effect of non-cash charges.
To answer your question, I like to see 7- year straight line deprecation on brewing equipment. How are you planning to capture the associated costs (electrical and plumbing)? What capitalization policy are you planning to implement?
Managing and reporting tax demands on product.
I am assuming that you are speaking about excise tax. I’ve reported using a computer system and by hand. If you are talking about beer, I believe that the beer is taxed once “it is removed for consumption or sale.” That means different things to different people. I’ve seen breweries calculate on the whole brite tank volume (over assessing tax in my opinion) and I’ve seen breweries use invoiced volume to level the tax (best definition of removal I’ve ever seen). It is obviously easier to have a system do the calculations for you, but you must have confidence in the system before you can trust the system’s reports. “With great power comes great responsibility…”
Does my manufacturing component qualify for tax exempt status?
Are you talking about manufacturing loss? If so, no, excise is levied on “removal for consumption or sale.” See above.
Common mistakes in tax planning?
- Not understanding the whole picture AND that every large decision will change the tax picture. That is why I like to have my tax CPA on board at everyclientand I ask to bring them in on every large deal. They spend their entire lives living the tax code. It is really nice to plug into that mind before a large decision.
- It is important to understand that you will be running a multi milliondollar business (hopefully!) and that will bring a very large tax bill. The rub is that all of the value of the company is IN the company and Is not very available to pay a large tax bill. Just about every owner I’ve ever worked with will be presented with a large tax bill in year 2, and they get extremely upset.
“How can they give half of their earnings to the government when all of the cash
is invested in stainless? Does the government know that we are just trying to get a business up and running?” To which I always answer “This is a country with a legal system that will enforce your contracts, gives you good roads to drive on and a chance to build a great brewery.” “You’ve built value in the business that is taxable.” It is important to plan for that tax bill.
Outsourced Accounting vs Home Grown Operations
As a small brewery, should I outsource my accounting to a company?
There are a lot of nice people that will “take the problem” of accounting away from you (FOR A PRICE). The problem is that they are going to want a professional wage and that is a big drag from your operational cash. If you are not careful, professional fees will equal the cost of an extra tank every year. If you have someone who can “keep the lights on” I would do that until you have a large enough barrelage to hire someone proper (I’ll expand on the accounting infrastructure life cycle in my talk on Wednesday).
With that being said, a good bookkeeper is worth his or her weight in gold. Once the books are setup correctly, the cost to keep it in balance is minimal. Make sure that whoever you choose has experience in not only brewing, but your level of brewing. Professionals like to show their worth by overcomplicating things.
Is it best to hire an accountant early on or handle books in house?
Please see above. Make sure that the books are established on a strong footing (and that structure will grow as the business grows). The best startups have an owner/founder with financial savvy. They are the first accountant of the company. In the beginning, all you really need is to make sure that the “wheels don’t come off” –i.e., that you have accurate cash accounting in an accounting system. I do not advise you to try to do your books without a computerized accounting system. QuickBooks online is almost a universal favorite for startup breweries.
Overtime your accounting needs will grow into operational metrics and cost accounting with the primary focus being inventory control. You cannot manage a manufacturing division of a company without strong inventory control procedures and practices.
My best advice to you is to get the best help that you can afford within your budget, but retain ultimate understanding and control.
Is it a good idea/advisable/recommended to hire an accountant to keep financial accountability
on brewery operations?
Owners often forget that they are the first accountant with financial accountability on brewing operations. I’ve seen owners divorce themselves from the financial reality and try to push it on an accountant “with no street cred’ on the brewery floor. That is a recipe for disaster.
That being said, once you grow to a critical mass, it will be extremely important to start building out a team (i.e. 5,000 BBLS). At that barrelage, you are starting to run a true production system and you need to begin to measure production using cost accounting metrics. Don’t hire too early. Organizing the brewery around true manufacturing practices takes time, effort and energy from the whole brewery. A lot of little guys don’t have enough of anything to stretch into real cost accounting.
Is it preferred to learn the necessary skills as an owner?
Knowledge=power=control.
If you don’t understand the language of business, you are forced to rely upon others to interpret your books. I advise all of my clients to have a working knowledge of brewing financials. You don’t have to be an expert, but you do have to know enough to gain a “Spidey Sense”. (Please see for free resources to help you sharpen your skills).
Start-up Capital
When to spend and when to save.
That is an individual question that deserves an individual answer. I will say that every overhead expenditure must be paid by the gross margin of the business.
Appropriate debt to revenue ratios.
Every brewery is different. Since most breweries are private, there isn’t a lot of information about industry averages. That being said, the Brewer’s Association does a benchmarking study. It is available in the members only section of the website (
Common mistakes in managing working capital?
- Not understanding the owners/founders living expenses. If you have 2-3 owners who need to pull down $10,000/month to make their monthly bills, that is a huge competitive disadvantage.
- Large open hop contracts. The entire market for hops has completely changed in the last couple of years. Breweries had contracted the maximum amount of hops. With the slowdown in volume, there are a lot of unclaimed hops at the supplier’s warehouse. I’m seeing almost market prices on the secondary market (see the Lupulin Exchange)
- Not understanding the malt price differential with a silo or super sack. I’ve even seen smallish breweries purchase a whole container from Europe directly.
At what point does one need to have financing secured?
People need to believe in your brewery concept. The brewery comes to life when people start to believe in it. That happens when you have to have enough of the company built to make a money person believe in you. Usually to obtain financing, you will need a basic financial proforma, logo and branding (what are we about anyway), good beers to sample and preferably a Letter of intent for a building. Those are the major steps towards creating a reality.
Is there a typical financing scheme: say equipment through a SBA loan, portion of capital from privateinvestors (percent?), plus personal capital(percent?) From private investors, do you pay back on profits? or some target interest equivalent?
There are also stages to raising capital. Before opening the brewery, you’ll probably need to find people willing to take a huge risk on you. Those people are called “FFF” (friends, fools and family). It is possible to attract professional money, but you’ll need to demonstrate that you have something special (experience in running a brewery or a lot of awards for beer). Once you’ve been open for a few years and have proven your concept, the professional money will be glad to organize an SBA loan. Since the SBA is backed by the federal government, banks are willing to take an early chance on your success.
As far as paying back private investors, most do not have a payback mechanism in the shareholder agreement. I have seen a few breweries do preferred dividends to pay back initial capital.
Should I target multiple small investors or a handful of large investors?
For better or worse, investors become family. And they may have a lot or a little to say. In general, it is easier to wrangle a small number of investors versus a large number of investors. I’ve seen brewery owners complain about large number of investors, but rarely do I hear them complain about small number of investors.
The real question is whether or not the investors have any say either in operations OR in financing. Keep in mind that a 20% investor must personally guarantee an SBA loan. I’ve seen brewer expansions fold because an investor was not willing to give the personal guarantee.
If the brewery goes bankrupt, how are investors handled and how is personal equity handled?
Common mistakes in fundraising?
In a bankruptcy, there is an established pecking order for debt satisfaction. Those people with a UCC Filing (a claim on the assets at the courthouse) have the right to take the equipment to satisfy the debt. That leaves unsecured debtors (i.e., employee wages and accounts payable). Once those people are satisfied, then the investors would see funds. Typically, they will lose everything.
Common mistakes are underestimating the amount of working capital to get started, building up too much too quickly, and ownership draws that strains working capital. Those actions take valuable funds that could be used to purchase malt and hops.
Operational Accounting Questions
Buy or lease my space.
It is always better to buy than to lease. You have control and you know that you won’t be kicked out with a short notice. Usually only those breweries that can raise enough capital can afford to purchase the building. It does take another layer of compilation that adds to the work to setup the company.
What accounting/financial/analysis programs are most beneficial to the CFO?
Another loaded question. The first CFO is an owner/founder who must also be the first salesperson and marketer. I see owners drown in sales duties before they can look at financials. That being said, any startup brewery should take a hard look at EKOS Brewmaster. It works seamlessly with QuickBooks Online, it has a low cost to implement and a low cost to manage. It will give you some idea of beer inventory and costing. At a certain production level, you will need a more sophisticated system, but I contend that you would need an annual run rate of 8,000-10,000bbls to start investing. That investment is in a system AND people to manage the system. They must go hand in hand.
How many kegs are necessary? Buying vs. renting kegs.
It depends….if you can afford it, I would always purchase your kegs just for the simple fact that a one- time charge of $100 is less than a regular charge of $14/month per keg. That being said, most people don’t have enough investment to purchase all of their kegs.
One caveat, if you are selling beer outside of your market or have a lot of barrel-aged beers (that people tend to sit on before tapping), leasing kegs makes sense.
What are typical startup brewery financial mess ups?
- Starting the brewery without a basic understanding of the income statement and balance sheet. Both must be maintained in order to make sure that the wheels don’t come off.
- Outsourcing accounting control to someone who does not have operational control. That means that they can see the iceberg but don’t have the ability to steer the ship away from it.
- Not knowing where breakeven is
- Not knowingwhatfinanciallevers you can push in order to increase financial performance.
Common mistakes in managing costs?
The most common mistake that I see is that people don’t even understand what their costs are. They become complacent with the fact that they have money in the bank and don’t look any deeper. The truth is that you are building a manufacturing plant and each step in the process adds to cost and adds to complexity. Proper cost accounting is a must once you hit the critical stage (8,000-10,000BBLS/year).
What factors should we include in the cost when working out a "per barrel" cost? Labor and materials? Every cost the brewery encounters? I mean, if beer is our main source of revenue, should a barrel? not
consider every cost of operation on the day-to-day? What are some good ways to anticipate thesecosts for business plan purposes?
Costing is a journey that will grow with your ability to add people and money to the issue. For startups, I’m happy if you are tracking inventory and batch costing. That at least gives you a general sense of material costs.
A few years into the brewery, I start to work on labor costing. This is the beginning of standard costing which takes attention from a trained professional (“don’t try this at home, people”). Then once labor is mastered, then I start on overhead costing. If you can get to that point, then you have the true beer cost.
Your question also delves into financial accounting. I am a big fan of divisional accounting. You can get most of what you are looking for in financial accounting by paying proper attention to the segregation of cost and an understanding of direct vs indirect costs.
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