Continuing from Part 1, this post contains questions asked of me during the 2018 Brewery Accelerator Workshop in San Diego, California, followed by my answers.
Operational Accounting Questions
What kind of software is there for keeping track of inventory, current state of finished beer/fermenting beer/future beers, etc. Are there all-in-one applications or do you need to get a few different programs to do everything?
Whatever you decide to do, make sure that you are as efficient as possible with you time, effort and money. It is better to master an easier software than try to start out with a complex software. I like Ekos Brewmaster for start-ups. It does a good job of tracking brewing operations and accounting journal entries while making it easier to use. If you want to go up market, that’s fine, but keep in mind that your competition is not spending a lot of administrative time out of the gate.
How much inventory should I have on hand?
That depends of what kind of inventory that you are talking about. The main rule of thumb is to have what you need, when you need it. At the beginning, that is easy to predict. As the brewery grows, the need for accurate inventory becomes more and more critical to the success of the brewery. That is why I am a huge fan of periodic inventory systems. While you don’t need to implement one at the start of the brewery, I would have one by the end of year two. I find that during the first year of a brewery, all of the founder’s energy is absorbed with making great beer and creating a good customer experience. Once you pass the “proof of concept stage”, then it is important to grow out the administrative side of the brewery.
How do I account for barrel loss or contaminated batches in my pricing?
You are taking about apples and oranges here. If you could price your beer according to its cost, then barrel loss would be an important component. The beer market has already established a going rate for kegged and packaged beer in your market. It is up to you to produce beer at the “correct margin” to ensure profitability. Understanding your true cost of producing beer will allow you to understand if your beer is giving you the gross margin that you need to make a profit.
Are programs like Ekos a worthwhile expense for a small town brewery with limited distribution?
It depends on your founder’s knowledge and skill set. If I started a brewery, I would have to know my total cost of making beer. I would stay up at night worrying about the numbers so I would want something to keep everything in balance. Other ownership groups don’t need to understand the all of the costing components. I will say that it is important to have a strong accounting foundation so that cost components are easy to find if you want to start reviewing beer costing.
By setting pricing into the higher tier will we be able to grow slow and steady and ensure that our product is only carried by accounts that represent our brand the way we want, or should we aim to grow faster with mid-tier pricing and grow into a higher tier?
Who is your customer base? Why should they spend more money for your beer than others? Once you understand your market, then you can answer the question. There is already someone in the local market making great beer. What makes your beer stand out?
I would like to understand the purchase contract for hops and any other raw material for which they might be recommended.
Fascinating question. A few years ago, I would have told you to make sure that you have an adequate amount of hops under contract. The problem is that everyone grew their brewery with dreams of wild expansion. At the same time, they contracted for those expanded amounts of hops. Now there is a huge glut in the hop marketplace. There almost isn’t a need to contract for future hops when you can get them on the secondary market.
I don’t typically see any other type of long-term contracts for raw materials. BSG and Country Malt do a good job of keeping stock in regional warehouses. What I do see is different purchasing patterns when the beer volume allows it. Purchasing a silo or super sack container is one of the best ways to lower the cost of grain. The other major efficiency that I see is purchasing a truck-load of printed cans. The quality is much better and the price is much lower than sleeved cans.
How much affect is the market saturation having on pricing?
Taproom prices are set by the local market. So, I would expect you to be able to charge what your neighbor is charging. Where things get difficult is in distributed sales. What sets your beer apart? Why would someone pick up your beer? You can’t play a pricing game with the larger breweries. Their economies of scale are much larger that you will ever see.
What (if any) kind of personal income could a new brewer expect? I personally think the scariest part of starting up a brewery is quitting a well-paying stable job.
That depends on sales and the costs of doing business. I don’t see a new start up brewery maintain multiple families out of the gate. It really depends on your fixed costs and the ready market for the beer. I will say, branching out to smaller towns may give you the profit margin that you need. The bigger question is whether or not you want to be running the brewery forever. The biggest struggle that I see is hiring professionals to do what you do. It is really hard to handle paying 100k+ in overhead salaries. That is why most founders are working owners. I would not get into this business assuming that you don’t have to be the heart and soul of the brewery for a long time. It is a passion job that fulfills in many other ways.