3 Brewery Margins You Should
Be Watching Closely
Are you currently running a busy brewery or thinking about starting one?
Perfecting your brewing skills and sharing your recipes can be really enjoyable. But alongside the fun stuff, it’s important to understand the financial side of things.
We get it—numbers and finances might not be everyone’s favorite topic, especially accounting. But if you can grasp some key business metrics, you’ll have the knowledge to make smart decisions for your brewery’s future.
Let’s take a look at the top three brewery profit margins you should keep a close eye on. These margins can make a big difference in whether your business thrives or struggles:
#1 Gross Profit Margin
As a brewery business, you need to keep track of the costs that are directly related to your products. We call these costs as “cost of goods sold” or COGS, which includes the following:
- Raw materials (e.g., hop, malts, yeast, water)
- Packaging supplies (e.g., boxes, bottles, labeling, tin cans)
- Direct labor costs (e.g., time spent in brewing, bottling, and packing)
- Shipping costs
These costs affect your gross margin because they are directly deducted from gross revenues. To compute the gross profit margin, we use the formula below:
Gross Profit Margin = Gross Profit ÷ Total Sales
Alternatively, we can expand the formula as:
Gross Profit Margin = (Sales – Cost of Goods Sold) ÷ Total Sales
What does it tell you?
- The gross margin tells you the cost structure of your brewery business, which could help you determine if the direct costs are eating up too much of your sales.
- Are you sourcing your direct materials at an expensive price? Is there a supplier out there who can supply the same quality of materials but at a lower price?
- Is your markup sustainable?
- The gross margin shows the amount of revenues left to pay for your operating expenses.
#2 Operating Margin
The operating margin is the amount of revenues left after deducting all operating expenses from gross profit. Operating expenses are necessary expenses for the business. Most operating expenses, such as electricity and water, are needed to keep the business running. Here are some examples of operating expenses in a brewery business:
- Facility expenses, like rent and utilities.
- Salaries and wages expense of administrative staff
- Office expenses and supplies
- Professional expenses, like for your accountant and lawyer
- Advertising and marketing expenses
- Compliance fees for licensing, regulatory fees, and other required fees
These are just some of the common examples of operating expenses. We deduct all of these expenses from the gross profit margin to determine the operating profit, as shown below:
Operating Profit = Gross Profit – Operating Expenses
To compute the operating margin percentage, we just divide it by the total sales.
Operating Margin = Operating Profit ÷ Total Sales
For example, let’s say that our total sales are $400,000, gross profit is $200,000, and total operating expenses are $160,000. Our operating profit is $40,000, computed as $200,000 minus $160,000. To calculate the operating margin, we divide $40,000 by total sales of $400,000 to arrive at a margin of 10%.
What does it tell you?
- The operating margin tells you how much operating expenses take from your revenues.
- You can use the operating margin to control costs that are outside production.
- Are there costs that can be reduced or cut?
- What line item has the highest cost? Is there a reason why this line item takes so much of the gross revenue?
- If the operating margin is low, is it possible that the markup of products is too low to cover all expenses?
#3 Profit Margin
Lastly, the profit margin is the final and the bottom line figure that most business owners look at every time they see the income statement. To compute the profit margin, we first need to calculate net income by deducting taxes and interest from operating profit.
Net income = Operating Profit – Taxes – Interests
To compute the profit margin, we simply divide net income by total sales. For instance, if net income is $20,000 and total sales are $400,000, the profit margin is 5%.
What does it tell you?
- The profit margin tells you the amount of income left for the business owner.
- It tells if you’ve met the desired results for the quarter or year. For instance, if the profit margin goal for the quarter is 8%, it means that the goal has not been met because the profit margin is only 5%.
- Overall, the profit margin helps you assess the following:
- Is the selling price of the goods enough or sustainable to cover all costs?
- Is the business generating enough cash flow to meet its debt requirements? To pay for future growth without outside investment?
Need Extra Help With Your Brewery Margins?
We know that not all brewery business owners are good at interpreting accounting information. However, you don’t need to be an accounting whiz!
You’re a brewery business owner, not an accountant. That’s why seeking help from experts can help you a lot. At U-nique Accounting, we’re a team of accounting experts with years of experience working with breweries and restaurants.
We know how brewery businesses work, and we’re confident that we can help you not only improve your margins but achieve your business goals.
Let’s chat, and see how we can help with your brewery accounting needs. Simply use our calendar down below to get in touch:
By MATT CIANCIARULO
