Manning Elliott LLP's Brandon Kelley shares his best advice for small craft breweries in BC
Brandon Kelly, CPA, CA
It started as a hobby: fermenting brews in the garage or the basement and sharing the results with friends. But that hobby grew into a passion, and then a business. So goes the story for many of BC’s craft brewers.
Craft breweries are booming in BC, thanks to high demand and incremental changes to liquor laws that have historically held small brewers back.
Many a beer-lover has dreamt about turning their passion into a profit, and more than a few have done it. But making good beer and running a profitable business are two different skill sets.
Manning Elliott’s Brandon Kelly knows good beer — and good business. As a CPA, CA with a background in business administration, he helps his clients in the craft brewing industry to maximize their profits through well-informed business and financial decision-making.
Here, he discusses the business side of craft brewing and offers some strategies for success.
What unique challenges do craft brewers face in the BC market?
A lot of brewers are artists before they are business people. Developing good financial reporting and understanding how to interpret the results is the key to having a successful business.
Obtaining capital is another challenge. Craft brewing is a very capital-intensive business. You generally have to get quite a bit of investment or financing from external sources to get a brewery started up.
A challenge that is really unique to craft brewing in BC is the pricing of the product, because you are dealing with the Liquor Distribution Branch, which has a big say in pricing your product for retailers.
Finally, input challenges are a big issue. For example, there might be hop shortages for different types of hops, so craft brewers need to have proper hop contracts in place to ensure they’re going to meet their production.
What opportunities should craft brewers be taking advantage of?
One area where we work with brewers is to help them understand where they should be focusing their efforts.
The biggest opportunity for craft brewers to maximize their profit is to look at where they can get the best margins. Many breweries will have a front of house — their tap room. Generally, that’s the highest margin for craft breweries. So we typically recommend that they maximize selling their beer through their tap room as much as they can.
The next highest margin is generally package products — the bottles going to liquor stores. And last will be the keg product that’s going out to restaurants and bars.
Another great opportunity is working with other brewers. Collaboration is very popular with craft brewers because they can share costs or work together in other ways to get some of that administrative cost down.
What is the main piece advice that you give to your craft brewery clients?
My main piece of advice is to run your business like a business — make sure that proper systems are in place for developing good financial reporting and use that reporting to manage your business.
I tell people to look at where they can keep their costs low, and develop strategies for maximizing production and profit. That means keeping the tanks full and making a schedule so that you’re maximizing use of all that equipment that you’ve put your capital into.
It’s also very important to manage cash flow. A lot of new breweries prepare forecasts that can be overly optimistic. They will expect higher-than-realistic revenues and lower-than-realistic costs. We see this quite commonly with new start-up breweries.
We work with a number of breweries, so we’re aware of the figures that other breweries are seeing in terms of, for example, wages per litre produced or gross margin on their product. We’ll go over these things with our clients and highlight aspects of their forecast that aren’t in line with what we’re seeing in the industry.
I come across a lot of brewers who think that cash will be coming in immediately, and they don’t necessarily take into account that there’s a time cycle of collecting the revenue and paying your suppliers.
And there are other cash flow considerations as well. Many breweries will have a cyclical business. They might have a tap room that’s really popular in the summer, but in the winter it dies down. Also, a lot of people start with small setups. They reach their capacity pretty quickly and they’ll realize that they have to grow to become profitable.
You have to have cash resources to bring you through those times. That includes the right financing and lines of credit, which is something we help our clients with all the time.
Brandon Kelley, CPA, CA is a senior manager at Manning Elliott LLP, one of the province’s largest independent regional accounting and business advisory firms with offices in downtown Vancouver and Abbotsford. Brandon provides specialized assurance and tax services to private enterprise clients in a wide variety of industries. For questions regarding this article, please contact us at 604-714-3600.