Transforming Distillery Performance Through Budgets
Hear from CPA, Maria Pearman, on how to build budgets that accelerate your distillery’s performance.
The process of preparing a budget is the single most effective management exercise for a distillery. It engages the leadership team and encourages accountability. With a budget, executives can hold department leaders responsible for their performance. Working from a budget will almost always improve financial and operational performance.
WHY BUDGETS MATTER
The budget is a mechanism for creating alignment within the organization.
The founder or board of directors sets a vision for the company. This vision is supported by long-range plans, which are usually agreed upon by the senior leadership team. Long-range plans inform the company’s annual goals, and these annual goals should be SMART (specific, measurable, achievable, relevant and time-bound).
Once annual goals for the distillery are established, they should be supported by departmental goals. The details of how each department will achieve these goals become the financial budget.
HOW TO WRITE A BUDGET
Start with the sales budget. Sales should be the origin from which subsidiary budgets derive. Best practice dictates not only preparing a financial budget for monthly revenue, but also a budget of sales volume by SKU.
If your distillery has a tasting room or restaurant division, it should have its own sales budget separate from wholesale sales. Once each department’s sales budget has been prepared, the accounting department consolidates this into one sales budget comprising all departments.
After establishing the sales goal, draft the production schedule. In this step, the production director, head distiller or operations manager schedules the batches, blends and bottlings to support the budgeted sales volume by SKU.
After the production schedule is created, the supply chain manager or production manager can draft a direct materials budget and a direct labor budget. If creating a budget for a tasting room or restaurant, the general manager will draft a cost of goods sold (COGS) budget and a labor budget based on the related sales budget.
Simultaneously, the sales and marketing director will draft their expense budget based on the consolidated sales budget. The controller or CFO will draft the operating expenses budget.
Once all departments have prepared their COGS and/or expense budgets, the accounting department consolidates these into one organizational budget.
This is the first chance for the leadership team to see how financials are projected for the year. Leadership should discuss whether the financial budget supports the agreed-upon annual goals, and they should propose changes if needed. The accounting team will revise the budget based on these recommendations. This review-and-revise process will continue several times until the team arrives at the best, most reasonable annual budget.
HOW TO USE THE BUDGET
The budget should be used throughout the year as a management tool to measure performance against expectations. By following the collaborative process outlined above, each department head will be engaged and will assume responsibility for his or her department’s budget because he or she actively participated in writing it.
The budget is a key feature in monthly financial review sessions. Each month, the leadership team should review financial reports and KPIs. The budget vs. actual report for each department is critical because each department leader will see if they are on track to achieve the year’s goals.
Invariably, there will be accounts that differ from what was budgeted. The scrutiny given to budget vs. actual variances should not be punitive, but come from a place of curiosity — to understand why the result achieved varied from what was expected. As each department explains the differences, this will shine a light on operational changes that must be made to adjust course.
In addition to monthly review sessions, the budget is a fantastic tool for measuring managerial performance. The budget vs. actual results can be helpful as a quantitative resource during annual performance reviews of managers.
Although it can seem daunting, developing a budget will pay dividends for distilleries of all sizes. A budget reinforces a company’s vision and goals and creates buy-in from team leaders. The budget becomes a roadmap for the course intended and a north star for the year’s success.
Register for Maria’s live webinar How To Build Budgets That Empower Distillery Performance happening on Tuesday, August 23rd at 1pm MT
ABOUT THE AUTHOR:
Maria Pearman, CPA, has more than 10 years of public accounting experience providing accounting and advisory services to clients. She is an expert in the beverage alcohol industry and specializes in internal accounting processes, financial reviews, budgeting, cash flow forecasting, financial strategy and succession planning. Maria helps clients improve financial results, maximize efficiency of operations, and she guides them through ownership transitions.
Maria is a featured speaker and author on topics in the beverage alcohol space, specifically related to craft breweries. She has taught courses at the Business of Craft Beer program at the University of Vermont as well as the Distilled Spirits Council of the United States Academy.
Maria wrote two top-rated books, Small Brewery Finance, published by the Brewers Association in 2019. Her second book, Distillery Finance was published May 2022 by the American Distillers Institute.
A longtime resident of Portland, she currently resides in Los Angeles.
