Inventory Purchases in Financial Projections

[grilli]

I feel incredibly dumb for asking this question, and I've put it off for months while getting a business plan and financial projections mostly in order. Well, at this point I still haven't figured it out to my satisfaction.

Inventory such as grains, hops, yeast buys, etc. We'll need to purchase these things periodically. I've accounted for an initial buy for 6 months worth of such inventory into startup costs. Beyond that, I don't have any further inventory buys included in my financial projections. Seems like a problem to me. I also don't know where I would include that information (guessing not the projected income statement, probably the projected cash flow statement and projected balance sheet).

I have good estimates of the costs involved in producing a batch, so I already know how much I'm spending when producing a batch. I'm accounting for those ingredient costs in my income statement and cash flow already (as cost of sales) so part of me thinks that's enough. The other part of me isn't satisfied because it feels like I'm only providing estimates for inventory when I need it, not before I need it. Obviously, if I can't properly estimate that the cash will be on hand for ingredients prior to making the batch, we might find ourselves being unable to make a batch.

[briangaylor]

I feel incredibly dumb for asking this question, and I've put it off for months while getting a business plan and financial projections mostly in order. Well, at this point I still haven't figured it out to my satisfaction.

Inventory such as grains, hops, yeast buys, etc. We'll need to purchase these things periodically. I've accounted for an initial buy for 6 months worth of such inventory into startup costs. Beyond that, I don't have any further inventory buys included in my financial projections. Seems like a problem to me. I also don't know where I would include that information (guessing not the projected income statement, probably the projected cash flow statement and projected balance sheet).

I have good estimates of the costs involved in producing a batch, so I already know how much I'm spending when producing a batch. I'm accounting for those ingredient costs in my income statement and cash flow already (as cost of sales) so part of me thinks that's enough. The other part of me isn't satisfied because it feels like I'm only providing estimates for inventory when I need it, not before I need it. Obviously, if I can't properly estimate that the cash will be on hand for ingredients prior to making the batch, we might find ourselves being unable to make a batch.

If you are factoring in 6 months worth of supplies at start-up, I would expect to place an order for another 6 months at the 5-6 month mark (depending on the credit terms with your supplier. Due all up front? Have 30 days to pay?). Buying those ingredients would obviously be a negative cash flow event and a cost associated with your income statement. IT would also appear as inventory in the balance sheet (and decline as you use it).

[grilli]

If you are factoring in 6 months worth of supplies at start-up, I would expect to place an order for another 6 months at the 5-6 month mark (depending on the credit terms with your supplier. Due all up front? Have 30 days to pay?). Buying those ingredients would obviously be a negative cash flow event and a cost associated with your income statement. IT would also appear as inventory in the balance sheet (and decline as you use it).

Excellent, I think this is where I was leaning. My only latent concern was with including ingredient costs in my cost of sales. It almost seems like I'm double counting the ingredient costs by doing that and adding ingredient buys every 6 months.

[Bainbridge]

I'm curious why you're holding on to so much inventory for so long? Any of the malt suppliers can get pallets to you in a week or so. (It's sometimes 3 days for us.) Couple that with the fact that most of them will grace you only one order before your Brewers Notice is granted anyway. (This is supposed to allow you to start test batches, but stop bootleggers from brewing without a license.)

[grilli]

I'm curious why you're holding on to so much inventory for so long?

This is a good question. At least for starting up, the idea is to be able to have ingredients available or accounted for regardless of the cash flow in those first few months. That said, I don't think it's a hard and fast rule that all 6 months worth need to be purchased at once, or future buys need to be every 6 months. If it makes better sense, we can buy the ingredients monthly or bi-weekly as long as the money is there and set aside. Maybe the space we land doesn't lend itself well to such a large inventory of ingredients, so that's another consideration. Anyway, my current focus is to make sure it's being accounted for properly in our budgeting and projected financials. But your question does give me some things to consider while we're still planning.

Interesting to hear that we might be able to do one buy before TTB. I was starting to think about test batches and such. The supplier I spoke with didn't mention it, but I didn't ask I suppose, and that was at a point when we weren't very far along in our planning phase.

[Bainbridge]

Seems to me that from a cash flow standpoint, ordering monthly, or bi-weekly makes more sense. We usually order malt twice a month. Cuts down on storage space and I'd rather have two $2500 net-30 bills each month than a massive $30,000 one every six months.