TRANSCRIPT

Thursday, July 6th, unlock code number nine. Let’s go. Today we’re gonna be talking about capital expenditures, okay? Cap Ex. Big purchases, big equipment purchases, right?

So, let’s start off with the definition. What is a capital expenditure? According to us, the accountants and CPAs are furniture and fixtures, brewing equipment or packaging equipment, computer & related, and vehicles, right?

Those are the general categories of capital equipment.

Now, the way we determine that as a capital equipment versus something maybe office expense or brewing expense is it’s gotta be, number one, in excess of over $2,500 (cost). And number two, we need a useful life of over a year. We gotta get at least over a year of use out of this piece of equipment. Okay?

So, now that we’ve established the rules as far as what capital expenditures are, let’s talk about how it relates to profit. ‘Cause we may or may not know that when you buy a piece of capital equipment that does not affect directly your profit and loss statement, it goes on to the balance sheet, right?

And then that piece of equipment is depreciated over time and you get a tax benefit through the depreciation. Well, let’s go and talk about the origin of purchasing capital equipment, right?

So, when you purchase capital equipment you rarely use cash. In the decade I’ve been doing this, I’ve seen probably one or two breweries finance their expansions and their growth for equipment through cash.

So what does that mean?

That means that you are taking out more debt or you’re raising more capital, or you’re putting more money into the business, which is another form of capital. Okay?

Let’s talk about the debt side, right? You take on more debt to buy a box erector, a 12-pack erector and you take out a loan for that, take out some extra debt.

That interest on that loan will begin to affect your profits over time. Okay? But I’m not saying not to get it. What I’m simply saying is, with all capital equipment, we need to determine a payback period. How do we determine a payback period?

The payback period basically means how long is it going to take for you to payback this piece of equipment? How much benefit are you gonna extract out of this piece of equipment to pay it back? Um, what are the ways we extract value out of equipment?

Number one is labor hours or labor, right?

We can reduce labor with certain robots and certain machines. And second of all, it could be we’re reducing waste if it’s a centrifuge. Third of all, it could be gaining back time by automating some items and reallocating those resources somewhere else.

So, there is value that can be derived out of out a capital equipment.

Another one I forgot to mention was tanks, right? When you purchase a tank, you’re gonna add more beer. If that beer, if there’s demand for that beer, if that beer is pre-sold, then you’re figuring out whether is it pre-sold in the taproom for major margins or is it pre-sold in wholesale for, what we hope, are our standard wholesale?

So, moral of the story today is not to deter you from purchasing capital equipment. It’s to encourage you to run a payback period to determine if this is going to be the right move.

Now, what’s a decent payback period of time? I would say anything under two years.

If you can pay for a piece of equipment in under two years, you’re doing well.

Some people set that benchmark for six to eight months. They’re so laser focused on, “Okay, we’re about to go back and take out all this debt or we’re about to raise more capital, our own capital in. We really need to see a benefit on this.”

If you’re getting a tank and the beer is sold and you are able to push it out, right? That’s going to result in more bottom line profit cuz you have more product to sell, right? If you’re gonna get a centrifuge, that’s going to increase your efficiencies by 10%. And once again, the demand is there for the beer that’s gonna derive more profit.

If you’re getting a whole fleet of new laptops, the payback period could be calculated on how quickly and effectively invoices are getting through and making sure that if they’re going out to sales reps or they’re going to the production floor, that the sales reps are inputting that information so we’re aware of what inventory is sold and what inventory is available that all derives down on a profit too, right?

And the production side, making sure recipes are inputted into the system, make sure batches are being processed and packaged the right way so then we can derive margins, so we can get a payback period or a value off any equipment that we purchase. Okay?

Unlock code number nine: capital equipment. Find out the payback period.

I’ll talk to you tomorrow.

See ya.