Article

A Better Business Framework: Thinking strategically about your nano

Over the past decade I’ve worked with several dozen nano startups, and often the beginnings may sound familiar: Homebrewer who’s been in their corporate career “too long” or almost-but-not-quite-ready to retire, financially secure, feeling the lure of self-employment calling. They’re ready to inject their savings into their startup, and they’d like to move quickly. The problem with moving quickly, however, is the lack of time put in to think strategically about the brewery’s purpose, goals, and intentions. Who are you? What is your business model? How will you define success? What role will you play in the local economy and how?

Without appropriate planning to answer questions like these, you end up devising workaround solutions, whether with brewhouse standard operating procedures (SOPs), financial reporting, or long-term goal setting. Reactionary thinking results in haphazard actions that ultimately cost the nano valuable resources, including time and profits.

With a nano’s size, one small seemingly innocuous action can throw the operation into a cash deficient position. So how do we step back and plan appropriately by thinking more openly, big picture about our operation? I’d like to introduce a strategic framework for every aspect of the planning process, and it applies to every facet of operations. This framework follows a cyclical, circular flow in four phases: Define, design, implement, and understand. Let’s look at each phase in greater detail.

Stage One: Define

All planning, whether with financial management, marketing, or production begins at this first stage. It is during this stage we define who we are, our goals, and most importantly, our success metrics. So let’s take a look.

From the marketing perspective, we should be asking:

  • Are we going to be a local lifestyle brand selling 100% over the bar, or do we want to eventually launch into local distribution?
  • What will that distribution strategy look like, and how do we set or define those goals?
  • If we choose draft-only distribution, how do we want to define success based on tap handle acquisition versus retention?
  • What will our distribution footprint look like?
  • Will we be packaging our beer, in bottles, crowlers, or cans?
  • How many interactions via social media or e-newsletter will we post daily, weekly, monthly?
  • Who will respond to the public’s comments, and how quickly?
  • How often will we release new label art?

From the financial perspective, we should be asking:

  • Are we going to set ourselves up with an LLC or simply report earnings via our personal Schedule C?
  • What will our annual production goal in barrelage be over the upcoming 3¬5 years?
  • How do those goals translate into sales dollars and growth percentages year-over-year?
  • What are our goals in terms of net income and retained earnings?
  • How many months of working capital will we target when it comes to our cash account?
  • At what point (month, year) will we as the owner be paid (this is important), and how much? What is our pricing structure?
  • From the production perspective, we should be asking:

How will we measure and control our losses and brewhouse efficiency year-over-year?

  • At which point(s) of production will we measure losses: From brewhouse to brite tank to package, or simply from brewhouse to package?
  • How will we measure losses in the taproom?
  • How quickly do we plan to cycle through our fermentation tanks?
  • How will we measure our keg turns in order to ensure we have enough cooperage?

As we define our operational strategy by answering these questions, we want to be sure we are setting specific, measurable, realistic benchmarks bound by time. For example, in year 1, we could say we plan to produce 225 barrels at no more than a 15% loss through the brewhouse and 10% loss through the taproom. We will sell 100% of our beer through the taproom in order to prove our concept and build our cash reserves the most quickly. We will release new beers every Thursday and communicate via post through all social media channels Wednesday evenings at 7p.m. EST. We will make no less than 76% profit margin (net sales less cost of goods sold) per pint in order to buy a crowler machine and an additional fermenter in month 6 of year 2.

A best practice is to set your long-term goals first, then build shorter-term goals based off that long-term vision. What is your end game? What do you want to accomplish with your nano? Then revisit those goals, both long- and short-term on a regular basis; at the very least, annually.

Stage Two: Design

By taking the time to plan the big picture in specific and measurable terms (such as in the example above), this will allow us to design our systems and processes to complement our strategy. It is here where we use the success metrics we have defined earlier in our framework in order to design our financial management systems, inventory management systems, and our SOPs.

From the marketing side, we design our language and tone we will use in our posts to ensure they stay on brand. We develop the stages of our label design process and choose to use a particular communication channel such as Slack or project management tool such as Asana to hold people accountable and on track. (It’s okay to use a white board or Post-It notes as a temporary solution, but these methods leave no paper or digital trail. They tend to disappear. If it’s just you and you alone responsible for 100% of the operation, things could quickly break down.) We decide to respond to all questions and comments on social media within 24 hours.

Reactionary thinking results in haphazard actions that ultimately cost the nano valuable resources, including time and profits.

From the financial management side it is during this stage that we create our chart of accounts (COA) and ensure we have captured all our revenue streams, each related cost of goods stream, and all our sales, general, and administrative categories. Assistance from an accountant may be something to consider. As attaining a 76% profit margin per pint is our goal in the earlier example, we must make sure we design our accounting and point-of-sale systems to readily present that information. As we are going to be measuring brewhouse efficiency and loss through packaging to keg, we must make sure we have variance accounts included in cost of goods portion of our chart of accounts to capture those losses. For a COA template, I can share one as an example. You can find that chart at https://byo.com/wp-content/uploads/COA-Template_Audra-Gaiziunas.xlsx

From the operational and production side, we design process flow by department and between departments. Production versus non-production sides of the business apply to every nanobrewery and are two distinct departments. We design the process for receiving inventory. We design our protocol for the clean-in-place (CIP) and sanitation cycle. We set the last day of the month as the day we take physical inventory counts and adjust the books to actual numbers. We design our process in tracking keg turns without sophisticated technology. We choose Tuesday morning as our administrative paperwork and bill paying day. We design our brew log to capture as much of this information as possible while also creating the least amount of additional work to complete the monthly excise tax returns and the quarterly TTB Brewers Report of Operations. We design our daily journal entry from our point-of-sale that tells us the exact amount of sales tax we owe the state at month-end.

Examples of filings that need to occur monthly include federal and state withholding and federal and state unemployment for all your employees (if any), state excise tax reporting, and state sales and use tax reporting. Examples of filings that need to occur quarterly include the Federal TTB Brewers Report of Operations, federal excise tax reporting, and state unemployment and contribution report. Examples of filings that need to occur annually include the Federal 940/941, the W-2 and 1098 (for all your contractors filing 1099 status) and the brewery’s state personal property detail. Most of this reporting averages 3–5 hours per month with appropriately designed systems or 6–8 hours without appropriately designed systems.

As we walk through all our defined success metrics, it is during the design phase that we develop our systems that will tell us consistently at any defined time interval whether or not we are meeting those success metrics.

Stage Three: Implement

Once we have designed our systems and feel they are well-matched with our success metrics, we implement them to ensure our systems provide us the information we are seeking. This is the equivalent of a beta test run to see what information sticks versus drops out, what creates bottlenecks and frustration versus ease, and what simply doesn’t work as intended, despite best efforts put forth. It is during this stage creativity with data collection plays a part, especially with such actions as brewhouse mishaps and causes, key cycle times, and packaging losses. You may also realize that tracking information in spreadsheets based on your model is too laborious and prone to error; therefore, you decide to purchase inventory management software instead.

The environment you create must be comfortable, memorable, and reflect what your brand is about.

Ideally, the implement phase takes place well before you’re open to the public to give you time to redefine and redesign until your processes match up to your success metrics and compliance requirements. Be sure to develop and design a communication strategy with all outside parties, even if you’re just a nanobrewery of one. You’ll be much better prepared should emergencies happen. Once you’re open to the public, periodically review your processes to make sure they’re still relevant. With our industry being so rapidly evolving and entrenched in constantly changing legislation, you want to ensure you’re keeping on track with those changes, adapting as quickly as possible, and not wasting needless effort and resources on a process or metric that no longer fits your model.

Stage Four: Understand

As you continue to analyze the data you’re receiving from the implement phase, you understand what worked and what didn’t, which metrics of success you can track, and how the information will all come together for compliance reporting. You keep those processes you designed that work and go back to the design phase for those that didn’t for revisions and a new round of testing. This is your time to reflect on what works for your brewery and where improvements can be made in all business aspects.

Finally, consolidate all the feedback and metrics involved throughout this strategic planning process into an annual plan, a budget. It is here we lay out sales goals: Mix by brand and package type and volume, marketing spend, production losses and variances, and general/administrative overhead for the year ahead. It shows us how much profit we’ll be able to roll back into retained earnings and gives us valuable insight into our cash flows to help us decide on whether we want to take out a future loan, or whether we’re investing too much cash in our inventory. This plan becomes our roadmap holding us accountable to our goals, and it also forces us to revisit our self-defined success metrics on a regular basis. We may not get that annual plan right the first time, but it’s more about the process than the result. Be forgiving. Be flexible. The more often you go through this process, the stronger it will become, but just like any sport, you can’t expect to master it the first time you attempt it.