The Accounts Payable Shell Game
Jack, take care of the business, or the business will take care of you.
So I got that line from the old Sly Stallone movie, Get Carter.
It’s a gem which perfectly describes what can happen to craft brewers who don ’t take proper care of their financial operations.
Here’s how it goes…in the movie, Stallone plays a Vegas loan-shark ‘collector’ who goes to Seattle to investigate the sudden death of his brother, Ritchie.
After Jack’s been snooping around Seattle for about a day, Con McCarty, one of Jack’s “co-workers” calls Jack to tell him their loan-shark boss isn’t too happy about Jack taking off like this and that Jack better get back to Vegas soon or he’ll have some real problems.
“Jack, take care of the business, or the business will take care of you,” Con tells him.
In other words, if you don’t stay focused on the job, you’re going to be in a lot of hurt.
And this applies wonderfully to the financial disaster all-too-many brewery owners create for themselves.
It’s rooted in a little thing called accounts payable.
More specifically, many brewery owners fail to properly organize the bills from their vendors - we’re talking about stuff like figuring out when bills need to be paid, actually paying them, and then accurately booking the payments in the accounting system.
Fun, right?
Of course not.
But if you don’t accurately take care of your bills/payments, you’re going to get trapped in what we at SBS call the ‘Accounts Payable Shell Game’ (aka the A/P Shell Game).
The A/P Shell Game goes like this:
While craft brewery owners would love to have the cash on-hand at the end of every month to pay all the bills (for hops, malt, cleaning kegs, office expenses...etc.), due to poor management and planning for the bills, the cash isn’t in the bank.
Thus begins the A/P Shell Game.
The basics of the game go like this: at the end of the given month, the brewery doesn’t have the cash to pay all their bills. So they’re forced to do desperate things like ‘robbing Peter to pay Paul’ (taking money meant for one vendor to pay another vendor), paying vendors late, moving cash from a savings account into the operating account, or - maybe worst of all - making the payment on credit card.
Do this enough times and you’ve got a rats nest of improper payments and likely headed for financial chaos.
So the concerned craft brewery owner’s question is…how do you avoid this?
How do you take care of the business before it takes care of you?
Well for starters, one of the concepts we talk about all the time at Small Batch Standard is ‘garbage in, garbage out’.
This means if you’re playing the A/P Shell Game, then the invoices which are coming in are most likely not being booked properly (they don’t have the right dates, they don’t have the right amounts…) and you don’t know the scope of your expenses or when they’re hitting.
So how can you remedy this - how can you escape the A/P Shell game?
It boils down to adhering to a few basic principles…
#1: Pay the invoice, not the balance
This is actually more of a tactic than a principle. You see, what happens is when a vendor sends a bill, it often has multiple invoices on it and a single balance totalling the invoices.
What happens next?
The bookkeeper or accountant simply pays the balance without addressing the individual invoices.
The problem with this is if those invoices were previously entered into your system, they’ll sit there with a status of “unpaid” - then if those invoices do eventually get addressed, there’s a risk they’ll be paid (without realizing they’ve already been paid as part bill’s balance) and now you’ve made a duplicate payment.
Yuck.
#2: All bills go to one place, everything funnels into one system
By using a single system to pay and record all payments, you keep everything nice-and-neat. This means that even if you’re using multiple systems, they’re all talking to each other and they’re all going to one place.
At SBS, the specific tool we use to do this is our bill.com inbox.
#3: Organizing all invoices by the amount and due date based on the terms in the agreement
Doing this ensures every bill is being marked as either paid or unpaid. This gives total clarity as to when something is coming up due and whether it’s been paid or not.
#4: Maintain a minimum of 3x cash in your operating account as your monthly expenses
This one’s more of a strategy than principle, but by maintaining a minimum of 3x cash in your operating account as your monthly expenses, you’ll have a buffer to handle those inevitable month-to-month financial fluctuations (buying bigger batches of inventory, a slow month in sales…etc.).
This means you’ll avoid shifting money around (the AP Shell Game) and creating a bunch of extra work for yourself.
So those are key recommendations we give to our clients which helps make sure they keep their numbers straight and avoid/escape the dreaded AP Shell Game.
My advice for your next step…
Take an honest assessment of where your business’s bookkeeping/accounting is at, and if you’re not already, start applying those principles asap.
I.e. take care of the business before it takes care of you.
And remember, we’re always here to help.