Working capital in a brewery covering stock, kegs and trade credit

Profit is not cash

A brewery's profit and loss account can show a healthy month while the bank account shrinks. The gap is working capital: the money tied up in stock, kegs, unpaid invoices and duty paid in advance, minus what you owe suppliers.

Brewing is unusually hungry for working capital. You buy ingredients long before you sell the beer. Lagers can sit in tanks for weeks. Kegs leave the brewery full and come back slowly, if at all. Trade customers expect credit. Every one of those steps holds cash that cannot pay salaries or rent. Our guide to cash flow in a brewery's first year looks at the same problem from the start-up side.

Where the cash sits

Walk through a typical small brewery and you find working capital in five places:

• Raw materials. Malt, hops, yeast, chemicals and packaging. Imported hops are often bought once a year. Imported malt arrives in container loads.
• Work in progress. Beer fermenting and conditioning. An ale might take two to three weeks from brew to sale. A lager can take five or six.
• Finished goods. Beer in bright tanks, kegs or cans waiting to be sold.
• Kegs in the trade. Every keg sitting in a bar's cold room is your asset and your cash.
• Receivables. Invoices to bars, hotels and distributors that have not yet been paid.

Against these you have payables: what you owe maltsters, hop merchants and other suppliers, if they give you credit.

Excise: cash out before cash in

In many states, excise duty or fees on beer must be paid before or at the point of release from the brewery, well before a trade customer pays you. For a brewery selling to bars on credit, that duty is effectively cash lent to the customer for the credit period. The mechanics vary by state, so check how and when duty falls due under your licence. Our guide to beer distribution in India covers how wholesalers and state corporations fit into this.

Measuring it: the cash conversion cycle

The cash conversion cycle tells you how many days your cash is tied up between paying suppliers and collecting from customers:

Inventory days + receivable days - payable days.

Suppose raw materials, beer in tanks and finished stock together cover 45 days of sales. Trade customers pay in 40 days on average. Suppliers give you 15 days. Your cycle is 45 + 40 - 15 = 70 days. If the brewery's monthly costs of producing beer are a given amount, roughly two and a half months of those costs are permanently tied up in the business.

Run the numbers with your own figures. The result tells you how much working capital you need and which lever will free the most cash.

Watch the cycle as you grow. Doubling sales roughly doubles the cash tied up in stock and receivables, so a brewery that grows quickly can run short of cash precisely because it is doing well. Plan the extra working capital before you sign the big new account, not after.

Kegs: the hidden capital

Kegs deserve their own line. A brewery selling draught needs a keg float: enough kegs to fill the trade, sit in the cold room and be in transit back for cleaning. A common rule of thumb is three to four kegs in circulation for every keg sold per week, more if customers are slow to return empties.

Every lost keg is capital gone. A floor detail worth copying: a weekly count of full, empty and out-in-trade kegs by customer, compared against the delivery notes. Our guide to keg tracking and losses covers the systems. A keg deposit or a clear return policy on the invoice also helps.

The levers that free cash

• Agree credit terms in writing and chase invoices on the due date, not a month later.
• Ask suppliers for credit once you have a payment history with them.
• Buy imported ingredients in quantities you can use within a sensible period, not just to save on freight.
• Keep the tank schedule tight so beer does not sit finished for weeks.
• Recover kegs fast and charge for losses.
• Sell more for cash in the taproom, where you are paid on the day.

Many small breweries arrange a working capital loan or overdraft from a bank. That can help, but it costs interest. It is cheaper to need less working capital in the first place than to borrow more of it.