Running a food or drink business is challenging in today’s market — there’s increasing competition, fast-paced trends and challenging access to retailers. If you run a fermentation-based business with a long production cycle, those market forces are compounded.
“A lot of businesses in this sector are in it because of the passion, they love what they’re doing, and sometimes the finances can feel very mysterious, there’s an aversion to dealing with it, and they aren’t taking the time to really look and understand the numbers,” says Maria Pearman, a principal with Perkins & Co., Portland, OR-based professionals in food and beverage finance and accounting. She shared her expertise during a TFA webinar, Best Practices for Cash Flow Management.
“Cash flow forecasting, it’s not rocket science. It’s not hard stuff. It is just very foreign to a lot of people and they avoid it,” Pearman says.
Matt Hately, a TFA Advisory Board member who moderated the webinar, agreed. Hately is an investor and advisor in fermented food and beverage brands.
“Managing cash…I would argue that it’s even more of a challenge for fermentation companies where your production cycles aren’t instant, they might take a week or three weeks or six weeks and, when you’re starting, your suppliers are probably demanding to be paid up front, your customers want 30-day terms,” he says .
Pearman, author of the book Small Brewery Finance, shared an overview on cash management. Fermentation businesses need to closely manage their cash conversion cycle as production cycles lengthen. The cash flow conversion cycle is the period between when money is spent to purchase ingredients to when payment is received from the sale of the final product.
Fermented products — which can take anywhere from a few weeks to even years to ferment — have a long cycle.
Pearman shared the example of a whisky distiller. After fermentation, whisky ages in barrels for years. All the while — before the product is ever sold — there are ongoing overhead costs for the distillery, like rent, utilities and staff.
“The rhythm of your cash flow is not going to match the rhythm of your income, and cash flow management is about bridging that gap,” Pearman says.
Cash Flow Forecasting
There are three primary financial reports that make up a business’ financial statements:
- Balance sheet (snapshot of the status of a company at a moment in time)
- Income statement (performance over a period of time)
- Statements of cash flows (sources and uses of cash over a period of time)
Often overlooked is cash flow forecasting, the expected inflow and outflow of cash over future periods.
The cash flow forecast, Pearman notes, is not standard in business financial records. It is usually kept outside of an accounting system as it’s information management generally uses. It’s important because a business can’t rely on just their income statement or bank balance to manage cash flow — labor, overhead and cost of inventory must be part of the expenses. She compared managing cash without a cash flow forecast to “building a house without a hammer.”
“One of the biggest pitfalls that I see with businesses is chasing profitability instead of cash flow,” Pearman says. “It is completely understandable because we’re all hardwired to try to do things as efficiently as we can, get the best deal, but truly in the early stages of a company, it’s way more important to manage cash flow than profitability.”
“It’s a high cost for bringing a new product to market. Cash flow issues are going to be prevalent regardless of where you are in your life cycle, and the best way to guard against cash issues is to have a cash flow forecast.”
During the webinar, Pearman shared a detailed look at a sample business’ financial workbook. She noted that it seems arduous to manage that level of detail but, without it, “you’re really flying blind.”
“It will force you to be highly in tune with the rhythms of your business,” she continues. “It will force you to learn it at such a level that it starts to become innate knowledge, you know it like the back of your hand and there’s no shortcut to that.”