How to grow your microbrewery/distillery from a financial perspective

The UK drinks market has boomed in recent years. The gin category alone achieved record sales of £2.2bn in the summer of 2018 according to the Wine and Spirit Trade Association (WSTA).

Craft beer is another category which has experienced a surge in recent years, with the number of new limited edition and small batch brands entering the market doubling since 2010.

A plethora of start-up businesses have emerged as a result of this boom and with that comes the need for funding and business support services tailored to the needs of drinks companies.

Having a long-term plan​

Having a long-term business model is important in order to be flexible and adapt to the market. Long-term plans allow goals, such as turnover projections and expansion proposals, to be monitored while being able to make necessary business adjustments as and when they are needed.

When it comes to funding, setting yourself up in the drinks industry can be expensive, so the start-up costs of equipment are usually the first priority for entrepreneurs, followed by ensuring the relevant regulations are in place.

Once established, with perfected and refined recipes and ingredients, the focus very quickly shifts to sales.

Although securing sales direct to consumers via an online e-commerce platform or through face-to-face transactions at consumer events such as pop-ups and farmers markets are often the first route for any ambitious business owner, the holy grail is to secure the volume orders from the on and off-trade channels.

Herein lies the challenge – secure a major order from one of the grocery or retail multiples and you can be excused for thinking you’ll be laughing all the way to the pub. More often than not nothing is further from the truth as this is when the true business management skills really come into play.

While retailers and UK grocery chains are often looking to differentiate and list new brands, they are also structured unfavourably for smaller food and drink producers who need to provide the finished product long before any payment will be received.

This is where fast growth drinks businesses need a secure financial pipeline which will enable them to keep producing and securing more listings while waiting for income from sales.

The importance of cash-flow​

When selling a product there are many duties SMEs within the drinks industry have to start paying, so ensuring a cash flow is in place to cover overheads is key. It also helps to protect a business against any invoice defaults they may receive from supermarkets or wholesalers as usually sales revenue does not pay off operational fees for a couple of years.

A form of cash flow management is invoice finance, which is a type of lending that allows companies to use their unpaid invoices to release money before they receive payment from their clients or customers.

Invoice finance is an effective way for businesses to protect equity and release capital as most SMEs don’t fail due to a lack of orders but due to a break down in cash flow.

It doesn’t matter how long your order book is if you’re not getting paid on time. UK businesses turning over less than £1m can wait an average of 72 days for invoices to be paid and this may be the difference between a microbrewery or distillery surviving.

With this in mind, SME owners need a relationship-based service rather than a funding arrangement so typically offered by banks and other providers.  Invoice finance can help enable expansion and fast growth aimed at long-term, sustainable success.

Credit management​

Another element of invoice financing is through outsourcing the credit management function to save time and money.

Credit management, also known as credit control, requires a specific set of skills in prompting the settlement of invoices which SMEs do not readily have access to in-house.

Small businesses often allocate the task to the office manager or bookkeeper. In some cases, it can also fall to the business owner, taking them away from focusing on business development. When you consider the time taken to chase payments together with the cost of salary and the responsibility and associated management time attached to employing staff it is not an insignificant cost to your business.

Using an external team can facilitate better in-house relationships with clients by removing tension created when chasing payments alongside doing business with them.

As an independent lender specialising in invoice finance solutions for SMEs, we have noticed a marked rise in clients wishing to outsource all their accounts, credit control and debtor protection to us alongside their lending facility in the last 12 months.

Despite standard invoice payment terms being 30 days in the UK, the specialist lender regularly has new clients coming to them with an average of 90+ debtor days. The gap in payments means SMEs are having to meet their commitments on a monthly basis – rent, salaries and regular overheads – using other cash sources which puts pressure on the business.