Glossary

A

Aging (Receivables and Payables)

The number of days that receivables or payables are outstanding. Aging reports are used to check for overdue invoices (either receivable or payable). The average days outstanding of receivables and payables is used to inform working capital requirements, and is also a measure of the “efficiency” of the business (in terms of how quickly it uses cash (from working capital) to generate more cash (revenues)).

B

Balance Sheet

One of the three foundational financial statements, along with the Income Statement and the Statement of Cash Flows. The Balance Sheet is a point-in-time description of what a company owns (its assets) and to whom it owes the value of those assets (either Liabilities owed to creditors or equity owed to owners). At the end of each accounting period, nominal or temporary accounts (Income Statement accounts) are closed out and journaled to permanent accounts (Balance Sheet accounts) to update the Balance Sheet.

Beer Advocate

Founded in Boston in 1996, BeerAdvocate (BA) is a global, grassroots network, powered by an independent community of enthusiasts and professionals dedicated to supporting and promoting better beer.

Breakeven / Profitability Analysis

Profitability analysis refers to a set of metrics that assess the profitability of the business. Some of these are expressed as ratios so that they can be compared against prior periods or against other businesses. Profitability can be measured relative to the cost of goods sold (e.g., Gross Margin), all costs and expenses (e.g., Net Profit), and assets (e.g., Return on Assets), among others. Breakeven analysis is a specific measure of profitability that considers how long it will take to recover an investment in a project (e.g., the initial opening of a brewery, a capacity expansion, a delivery truck purchase). In addition to breakeven analysis, project profitability is often assessed using Net Present Value and, less commonly, Internal Rate of Return analysis.

Budget

A budget is a plan. It represents management’s intention, and is a benchmark that is managed to. A budget is not a forecast. (See Forecast, below.)

Burn Rate Analysis

The rate at which a business consumes investment, typically a focus of management while starting a new venture or building out an expansion before the investment begins to generate revenue. The burn rate and the amount of investment cash on hand determines how long a venture can be sustained without additional income or investment.

C

Capital Assets

In contrast to inventory and other cash / cash equivalents, capital assets are assets that are not expected to be sold in the normal course of business and have useful lifetimes greater than one year (e.g., fermenters, brewhouses, vehicles, kegs). These assets are capitalized (see above).

Capital Raising Strategy

Debt vs Investment. Debt (e.g., loans, bonds) and equity (i.e., ownership) are the two conventional methods of raising capital for a project (e.g., founding a brewery, building out an expansion). The choice of which method to use depends on many factors, including their relative availability and cost, covenants related to prior rounds of fundraising, and the preferences and plans of the owners. The mix of debt and equity used to finance the business is called its capital structure, and the process of raising that money is also called capitalizing the business (not related to the concept of capitalizing assets).

Capitalization

The practice of recognizing the purchase of an asset over time in the form of depreciation expense. In this case, the value of an asset (less whatever depreciation expenses have been recognized) sits on the balance sheet and is counted among the company’s assets. In contrast, when assets are leased (e.g., buildings or kegs), their costs are expensed in the period in which they were incurred, and the assets themselves do not appear on the company’s balance sheet (because the
company does not own them). The decision to buy vs. lease (e.g., kegs, buildings, vehicles) impacts the value of a company’s assets (and equity) and therefore measures of profitability (e.g., return on assets, return on equity).

Cash Forecast

A forecast of cash in the future. This is a particularly important tool for making go / no-go decisions on investments, or for analyzing their size and timing (e.g., if I buy more fermenters in June, will I still have enough cash to pay employees and vendors?).

Cash vs. Accrual Accounting

Cash and accrual accounting are the two basic methods of accounting that businesses use. They differ in the timing of when they recognize revenues and expenses: cash accounting recognizes them at the time that money is received or paid, while accrual accounting recognizes them during the period in which related activity occurred. For example, if kegged beer was purchased on June 30 and paid for on August 1, cash accounting would recognize the revenue in August, while accrual accounting would recognize the revenue in July. The difference is largest for infrequent expenses (e.g., income tax), which accrual accounting recognizes fractional amounts of during each period, while cash accounting recognizes all at once when paid. Accrual accounting is more complex, but also provides a more accurate picture of the relationship between operations and the business’ financial position.

Chart of Accounts

The list of a company’s accounts. Conventionally, Balance Sheet accounts are listed first (assets, then liabilities, then equity) followed by Income Statement accounts (revenues, then expenses). Businesses that have defined multiple divisions or segments will reflect these structures in their charts of accounts.

Company Valuation

“Book value” refers to the value of a company from an accounting standpoint based on its financial statements. Importantly, this is typically not how investors would value a firm. Depending on the goals and sophistication of the investor, they are more likely to value the business based on an industry-specific multiple of revenue, profit, or cash or based on projections of future cash flows. In the case of an acquisition, they will also consider whether they have additional resources (e.g., access to cheaper debt capital, distribution in new markets, professional management, back-office efficiencies) that can increase the value or reduce the effective cost of the target. “Fair Market Value” is when the costs to an acquirer and future revenue of a business post-investment ar fully considered, a business will be “worth” considerably more or less than its book value.

Cost of Goods Sold (COGS) / Manufactured

The Cost of Goods Sold is the cost of materials, labor, and overhead directly related to the production of goods sold. In service, industries it is referred to as the Cost of Sales. COGS does not include costs associated with sales, distribution, marketing, back-office operations, taxes, or financing (i.e., interest on debt). Managing COGS includes executing production well (e.g., low defect and loss rates) as well as procurement (e.g., securing favorable pricing, ensuring supplier quality meets production requirements).

Credit

One of the two fundamental kinds of transactions in accounting, credit comes from the Latin “credere” (“he trusts”) and represents capital (in the form of debt or equity) entrusted to the business. Hence a credit increases liabilities and equity, and decreases a business’ assets. A credit is denoted by “CR” following an amount, or as a negative number, depending on the system and format in use.

Current Assets

As opposed to capital assets, assets expected to be used within 12 months, including inventory, cash, cash equivalents and net accounts receivable (accounts receivable less allowance for bad debt).

Current Liabilities

Liabilities due within 12 months, as distinct from long-term liabilities (typically loans). These include accounts payable, credit card balances, specific accruals and the current portion of long-term liabilities (the amount of loan principal to be repaid in the next 12 months).

D

Debit

One of the two fundamental kinds of transactions in accounting, debit comes from the Latin “debere” (“he owes”) and represents what the business has because of – and owes back to – its funders. A debit increases assets and decreases liabilities and equity. A debit is denoted by “DR” following an amount, or as a positive number, depending on the system and format in use.

Decrement

Generically, decrement means to decrease (as the opposite of increment). This is primarily used to explain the loss of inventory (either as a sale or as a result of a physical inventory count).

Depreciation (Useful Lives)

Depreciation is the periodic expense that is entered as a way of recognizing the cost of a capital asset purchase over the span of its useful life. The amount of depreciation to be taken each period is calculated by the use of a depreciation schedule. The remaining value of a fully-depreciated asset at the end of its life, is referred to as its salvage or disposal value. The tax and book (accounting) value of capital assets may differ because different depreciation schedules may be used for each purpose. There are several types of depreciation and the calculation will depend on which method is used. The most common form of depreciation is book depreciation. There is an entirely separate calculation of tax depreciation. Conventionally, book accounting uses straight-line depreciation, meaning that the depreciation expense in each period is constant over the lifetime. Tax depreciation may use accelerated schedules which allow a greater amount of the purchase to be recognized in early years for tax purposes. Since expenses reduce taxable income, this has the effect of reducing the company’s tax burden.

Direct Costs

Direct costs are costs directly attributable to specific units of production (e.g., material costs, hourly wages for production time). Direct costs are included in COGS. See Indirect Costs, below

E

EBITDA

Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure of earnings often used in financial analysis as a proxy for cash flow from operations. Importantly, EBITDA does *not* represent cash. While it is a convenient shortcut for use in certain financial analyses, it is not generally not particularly useful to managers, and if confused with cash has the potential to be dangerous. Following the same nomenclature, EBIT is Earnings Before Interest and Taxes and EBT is Earnings Before Taxes.

F

Forecast

A prediction of what management believes is likely to occur (or a set of predictions of several possible outcomes). Forecasts are often used to generate assumptions that are used to develop budgets. Because forecasts will almost always be wrong, it is important to test how sensitive critical assumptions are to changes in forecasts. A forecast is not a budget. (See Budget above.)

Free Cash Flow

A specific measure of cash flow that is sometimes used to value a business. Free cash flow is defined as cash from operations (as it appears on the Statement of Cash Flows), less the capital expenditures required to maintain the business (e.g., periodic equipment replacements or retrofits). Free Cash Flow (FCF), like EBITDA, strips out the direct impact of financing and tax effects, which provides a clearer picture of how a business operates than net income. FCF differs from EBITDA in that it is based on actual cash flow, whereas EBITDA is not (though it is sometimes used as convenient approximation). Additionally, FCF takes into account the ongoing capital expenses required to maintain the business as a going concern; EBITDA does not. It is commonly used in valuing firms.

Fully-Burdened Labor Rate

The unit cost of labor including benefits (e.g., medical insurance, worker’s compensation, and paid time off). Also referred to the “fully loaded” rate.

G

Gross Margin

Revenue less Cost of Goods Sold. The Gross Margin represents the profitability of production and procurement operations.

I

Income Statement

One of the three foundational financial statements, along with the Balance Sheet and the Statement of Cash Flows. The Income Statement is a summary of a company’s operations over the course of a period from a financial perspective. The Income Statement follows a conventional format: revenues, costs of goods sold, expenses, depreciation, and amortization, interest, taxes, and finally, net income. At the end of each period, the nominal or temporary accounts that comprise the Income Statement accounts are closed out and journaled to permanent accounts to update the Balance Sheet.

Indirect Costs

Indirect costs may be necessary to enable production but are not directly attributable to production. Examples include rent, insurance, management salaries, depreciation, and interest on debt. indirect costs are not included in COGS. See Direct Costs, above.

Inventory

Materials that have been or will be used in the production of goods to be sold. Inventory includes raw materials inventory (prior to any processing by the company), work in process inventory (goods on which some processing has been done but which are not yet ready for sale), and finished goods inventory (goods ready for sale). Inventory is an asset, and managing it well is an art of balancing competing operational and financial goals, including maintaining freshness, avoiding stock outs, and optimizing working capital.

N

Natural Balance

Also called the “normal balance”, the natural balance of an account is the balance that it will typically carry over the course of a period. Asset accounts have natural debit balances, while liability and equity accounts have natural debit balances. Revenue accounts have a natural credit balance, and expense and cost accounts have natural debit balances.

Net Present Value (NPV)

A valuation technique that accounts for the investments required for a project, the revenues it will return (specifically, often the free cash flows), and the time value of money (reflecting both the risk involved in a project and inflationary expectations). NPV is one of several measures used to assess the profitability of a project or investment and answers the question, “How much is this worth to me today?”

O

OBEER

OrchestratedBEER is an all-in-one business management software solution that helps you manage every aspect of your brewery from accounting in the back office to iPads in the brew house.

OrchestratedBeer

OrchestratedBEER is an all-in-one business management software solution that helps you manage every aspect of your brewery from accounting in the back office to iPads in the brew house.

Overhead

Overhead refers to indirect costs that are not attributable to specific production. The overhead rate or “burden rate” is the per unit overhead cost that is used in managerial accounting (or cost accounting) analyses. The burden rate must be carefully understood lest it be thought of as a variable cost when this is not true. The classic case of misusing overhead rates when a troubled firm figures out, after accounting for the overhead rate, that one of its production lines is losing money. Management shuts down the line, but because the overhead doesn’t go away, that overhead rate for its other lines increases, and now management discovers that another line is losing money. Management shuts this line down and repeats the process until it has shut down the entire business.

Q

QuickBooks

QuickBooks is an accounting software package developed and marketed by Intuit. QuickBooks products are geared mainly toward small and medium-sized businesses and offer on-premises accounting applications as well as cloud based versions that accept business payments, manage and pay bills, and payroll functions.

R

Ratios

Ratios are metrics used in financial analysis that are expressed as fractions or percentages. This – in combination with the use of standard accounting principles – allows for comparison between different firms, or within a firm over time. Ratios can be used by managers to identify opportunities to improve operations, by owners and managers to optimize the use of capital, and by investors to evaluate the risk and return of prospective projects or purchases.

S

Selling, General, and Administrative Costs (SG&A)

This section of the Income Statement contains indirect costs. It does not affect Gross Margin, but does affect Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA). Managing SG&A is less straightforward than managing COGS or Gross Margin because these costs have a less direct impact on sales and costs and are often fixed in nature. While high SG&A relative to peers may reflect inefficient or unnecessary operations, low SG&A may represent underinvestment that could hinder growth or profitability.

Sensitivity Analysis

This technique tests how much or little the outputs of an analytic model are influenced by individual inputs. It helps to identify the effect of factors that most influence outcomes. As part of interpreting analyses and making decisions, it indicates which Inputs most important to double-check. As part of implementing a project, it suggests which factors should receive ongoing oversight as part of risk management.

Standard Cost

An expected unit cost for direct labor, direct materials, and manufacturing overhead (direct costs) set by management for use in budgeting and, in the subsequent period, as a benchmark against which variances are measured. Variances are conventionally broken down into volume variances (e.g., “We spent less on malt last month because we produced less beer than planned”) and price variances (e.g., “We spend less on malt last month because we got a better price than planned”). Standard cost, once appropriately established, are a useful tool for managers to discover and understand variations from plan.

Statement of Cash Flows

One of the three foundational financial statements, along with the Balance Sheet and the Income Statement. The Statement of Cash Flows is a summary of a company’s cash flows – both in and out – over the course of a period. The Statement of Cash Flows follows a conventional format: Cash from Operations, Cash from Investing (i.e., purchases and sales of assets and financial investments) and Cash from Financing (e.g., taking out and repaying loans, equity investments, dividends to owners). Due to noncash expenses changes in working capital, a business with positive net profit can still be losing cash, so the Statement of Cash Flows and Income Statement are most useful when interpreted together.

T

Taproom

A room in which alcoholic drinks, especially beer, are available on tap; a bar in a hotel or inn.

W

Working Capital

The difference between current assets and current liabilities. If positive, this represents un-invested assets (e.g., cash held in reserve, inventory tied up in process, uncollected receivables). If negative, a company does not have enough assets to meet its current obligations.