How to improve your COGS-management game with positive constraints, process improvement, and financial data.

As a business owner, it’s critical to balance the economic reality of production costs and the realistic market price of your product. Especially in artisanal trades like craft brewing, understanding the unit economics of the business can make or break profitability. There’s no point to creating a great product if you can’t afford to keep making it!

This is a lesson I’ve learned from experience, as the VP of Brewing at Societe Brewing Company. Managing your cost-of-goods-sold, or COGS, as a driver for your pricing strategy is the only way to sustain great products.

What is Cost-of-Goods-Sold (COGS)?

The cost of goods sold (“COGS”) represents all the direct costs of production. COGS is important to track in your accounting and brewery management systems because it tells you how much of each unit sold is available to cover non-production uses of cash, such as:

• Payroll or third-party service fees
• Rent or lease payments
• Debt payments
• Utilities
• Office supplies
• Professional fees (licensing, lawyers, etc.)
• Marketing and advertising
• Sales salaries and commissions

Without a clear understanding of COGS, many small businesses don’t include enough margin in their pricing to cover all of the indirect expenses associated with operating their business. These costs can quickly add up, disrupting the balance of profitability.

Three Steps for Craft Brewers to Take Right Now to Improve Profitability

Mismanagement of COGS can be a hurdle for many brewers who feel limited by attitudes within the industry regarding the commercialization of an artisanal product. As a result, this can stifle innovation and reduce the economic resilience of some incredible products.

In my personal journey, I’ve used the following approach to improve margins by nearly 30-percent across our portfolio in 12 months. Following these three steps has been a game changer for our team – and could be for yours, too.

1. Embrace Positive Constraints as Spurring Innovation

A positive constraint is a defined limit that ultimately creates conditions ideal for growth. For example, setting a tight deadline for a project often motivates a team to complete extraordinary tasks. These conditions can lead to enhanced creativity, resource efficiency, and greater discipline.

When it comes to managing the finances of a business, employing positive constraints provides structure and predictability. From a COGS management perspective, consider:

• Getting your profit and loss in order, and ensure everything is mapped correctly
• Setting strict budget caps
• Focusing on lean operations
• Enforcing strict cash flow management practices
• Requiring cost-benefit analysis actions
• Setting and striving for sustainability goals

By introducing this level of fiscal discipline, you are setting your business up for success in the long run.

2. Collaborate with the Brewing Team (maybe start with this one?)

Finance is rarely ever exclusive to the finance department or CFO. It is a collaborative process that requires adherence and input from everyone involved in the spending of money and the generating of revenue from the ground up.

Start by collaborating with your brewing team to audit processes and recipes from a COGS perspective. Every step of the process from how water is filtered to the grains, hops, and yeast that go into each recipe all contribute to the direct costs. If you need to make changes to improve COGS, you need to start here. You need to cheat on beer with unit economics. If you can’t say with confidence whether any of your products are losing money, then here are some steps to start getting a handle on where your actual profit (or loss) is being generated:

• Break down the unit cost for every single product that you sell. (This was the greatest starting wisdom given to us by accounting firm kept.pro, and ultimately the thing that set us free. The beauty of this is that while it can be a tedious process, it's accessible for anyone willing to dive into it. All you have to do is commit the time and energy to figuring out this vital information.)
• Audit all raw material suppliers. In order to find the best price, ask questions about quantity price breaks, and always try to negotiate.
• Challenge the brewing process in order to streamline recipes for maximum efficiency.
• Audit shipping in and out in order to ensure the lowest price.
• Get rid of non-profitable products, or consider a price change if they are a customer favorite.
• Audit water, Co2, and chemical usage.
• Track your spending on maintenance and work to reduce spending where you can without sacrificing the quality of the product. You’d be surprised what inefficiencies you can correct when you sit down and take a strategic look.
• Set goals and track against the P&L on a monthly basis – and adjust accordingly.

3. Measure, Measure, Measure

The third piece to the COGS puzzle is measurement. Without measurement, you have no baseline for performance. And without a baseline, you have no way to indicate improvement. You can make all the changes in the world, but they’re pointless without understanding their impact. So, measurement is a must.

Your craft brewery economics aren’t something that you measure once. This requires continual effort with a documented accounting process and strict adherence to that process. So, now that you realize that you have to track the cost of each ingredient in each recipe, what happens if those costs are only recorded on every other purchase order? The short answer is that missing data creates holes that will sink your ship – or at the very least, steer you off-course.

I’ve set this up to measure the cost-per-barrel of production per batch in Ekos. Doing this allowed our leadership team to measure improvement on the income statement in Quickbooks Online (QBO), creating a direct line between operations and finance.

Taking brewery economics to the next level, you can use the same processes to collect data and measure product quality. You can set up a tasting panel to monitor existing products or sample new products in the tasting room with a mechanism for collecting feedback.

Measure cost and quality side-by-side so that any changes in favor of cost do not negatively impact the quality of your product. This approach isn’t about stripping away an artisanal product and making it commercial – it’s about identifying waste and inefficiencies so you can make the same great product commercially-viable.

Get Control of your COGS and Drive Profits

The craft brewery industry is known for creativity and innovation, not necessarily value pricing. But that doesn’t mean your brewery can’t be a successful business. It doesn’t matter whether your brewery is on a college campus filled with cash-strapped students or in a high-end downtown location, the process to build a profitable business starts with simple economics. Understanding your COGS and using a combination of positive constraints, collaboration, and data can make all the difference.

At kept.pro, our mission is to empower businesses like Societe Brewing Company and help them learn and grow. If you need help drilling into your unit economics, our team can help. Contact kept.pro today.