ECONOM ICS of WHISKEY N O I T C U O R D P Part II – Addressing Ongoing s Cash Need
for the Growing Craft Distillery Written by Jeff Quint
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n the previous edition of Artisan Spirit, we explored the basic economics of craft whiskey production. We learned why a whiskey distillery becomes quite valuable as it emerges and achieves a certain scale. We showed not only how the entrepreneur that starts the operation is rewarded, but Read Part I how a group of financial investors can be Value Creation handsomely rewarded as well. This article will build on that previous analysis. What we didn’t get into in the last story is the myriad cash flow issues/concerns that develop once the company is up and running. Cash is the lifeblood of any business. You can only stay in business for as long as your cash holds out. As soon as it’s gone, you’re done, game over. Cash is generated and cash is consumed. If we consume more than we generate, no other business will do business with us and no employee will work for us, because other businesses and individuals are worried about that same thing we are: running out of cash. How is cash generated? Of course, we immediately think of selling something — a sales transaction. But for this report, we’ll also include equity infusions and debt as sources of cash. You can’t have a sustainable business without significant upfront, as well as ongoing investments, as we’ll see.
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How is cash consumed? Again, we immediately think of buying something — a purchase transaction. This will include product input costs (liquid, packaging, excise taxes, etc.), as well as selling expenses, salaries, rents, and other general/administrative costs. But, again, for this report, we’ll also want to address cash used up for things like (a) growing your inventory and (b) capital investments, such as production equipment, warehousing, and tasting room expansions. These things also consume cash. The point here is that, aside from the normal selling and purchasing activities, there are other factors that affect cash, such as financing activities and investment activities. We can’t be comfortable that we’ll keep sufficient cash on hand until we’ve fully evaluated these other sources and uses of cash. A simple way to do this is to look at an example company during one year of growth when they are still ramping up and in high-growth mode. We’ll look not only at their simplified profit and loss (P&L) for that year, but their beginning and ending balance sheets. The example company is set up to be in high-growth mode, where it has already spent a few years making and aging whiskey and has begun selling it (30,000 cases sold in the year of this scenario) profitably, but is still growing its volume up to the point where it will level off at 50,000 cases of whiskey annually, where its current production capacity is maximized.
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