The Business Plan: Part II - Cash Flow Analysis

It's like free money! If you've never written or even seen a business plan before, the whole concept might seem daunting. I had only seen one, maybe two business plans before I started writing my own, so I barely had any idea what the hell I was getting into. But fret not! It's very easy to do but you have to put the the time into the research, analysis, and writing. Probably the biggest discovery I made while writing mine is the incredible amount of insight I gained into the business. I'm a guy who absolutely despised the accounting class I took during my freshman year in college. I was an engineering student and 2+2 always equaled 4. In accounting, 2+2 could equal 4 depending on whether or not you depreciated it over 7 years. But after writing this business plan, I feel like I have a real grasp on these numbers and how important they are to the health of the business. So if you're dreading writing a business plan, I would propose that you'll get a lot out of it beyond just the pro forma documents banks and investors require from you. You'll gain a very healthy understanding of just how much money you're going to need to get started, how long it will take to break even, and how much beer you're going to have to sell to grow the brewery. Let's dive in.

The most crucial component of the business plan is the financial section. My financial section is comprised of: cash flow analysis for years 1-3 and startup, profit and loss for years 1-3, break even analysis, start up expenses, and personal financial statement. You can also include an opening day balance sheet and an end of year one balance sheet, but I did not. No real reason why I didn't and I still might if a banker or investors want to see one. See the “Business Plan for a Start Up” template located at the SCORE website, which I relied upon greatly. Obviously this is all done with spreadsheets, so when I write "analysis" I'm referring to spreadsheets that are created with all relevant numbers plugged in. Here again, the SCORE website has spreadsheet templates for all of the financial analysis. They're a great place to start and I relied on them heavily but customized them greatly. I'll talk about the cash flow analysis in this post and discuss the other financial analyses in the next posts.

The cash flow analysis is absolutely critical in a business plan. It is often said that the number one reason small businesses fail is negative cash flow. You can sell a million barrels of beer a year, but you won't survive if you can't pay your monthly bills while waiting for your accounts receivables. Cash flow analysis lays this out very, very nicely. It's a fantastic visualization of the health of your business month by month and will prove vitally important once your business is up and running. You have to know if your cash outlays are outpacing your inlays so you can take corrective action before you run out of capital. So yes, it's one of the most important parts of a business plan, but it's even more important once you're up and running.

One of the costs I paid particularly close attention to in my cash flow analysis was packaging supplies, meaning cans, lids, etc. Because the minimum can quantities are quite large (10 pallets = 81,690 cans) PER can design, plus lids (1 pallet = 318,181 lids), cash outlays will initially be quite volatile and very large (10 pallets of cans = $7500 + freight). I modeled my cash flow analysis to automagically add the cash outlays for cans, lids, 6-pack holders (PakTech handles with 13,000 min. per order), and mother case boxes (the box a case of beer is packaged in) based on bbl production. I looked at the next month's production volume to determine when supplies would need to be ordered so they would be available when needed, subtracted out how many items required (which is based on what percentage of beer will be kegged vs canned, which is guesswork at this point) from the current inventory, and if I was going to run out of an item, the cash outlay was added to the month. It took me a while to get all that figured out, but I'm pretty happy with the final results. I used the same methodology for ingredients as well. My point with that long description is that I think it very wise to try to capture as much detail as you can in your cash outlays if at all possible, especially the big stuff.

Other line items in my cash flow analysis are the basic business plan 101 items such as labor, insurance, rent, utilities, etc. Because this is a brewery, you have to include the always lovely federal and state excise taxes. Federal excise tax is $7/bbl, IL state excise tax is $0.231/gallon. Yes, that is not a typo, 23 cents per gallon, not barrel. Federal excise tax is based on bbl's sold, whereas IL state excise tax is based on bbl's produced. I calculated this distinction of sold vs. produced by adding back in the 15% fermenter loss (which is typical) when calculating the state excise tax. I BELIEVE this is correct per my conversations with my favorite local craft brewery, but worse case scenario, I've overestimated some monthly costs, which isn't necessarily a bad thing.

Another important item to include in any cash flow analysis is payroll tax. You have to pay state and federal payroll tax for all employees. In IL, I have that total number as 7.65%, which is multiplied by monthly payroll, of course.

Finally, don't forget waste removal (spent grains) and CO2 costs. In addition to its obvious use for forced carbonation in a bright tank, CO2 is also used during packaging for purging the container just prior to filling among other uses.  I modeled my CO2 costs at $3.13/bbl. This was extrapolated by using actual data from a brewery, so I think this is a pretty solid number.

So I think that covers cash flow analysis. You'll spend a lot of time on this part of the business plan and you'll go back to it again and again to tweak, correct, and add costs you hadn't thought of, at least that's what I did. Sweat the details as much as you can.