Keep your winery business on track with Quarterly Financial Reviews
How often do you look at your financial statements? How often do you look at your financial statements and actually know what you're looking at?
We recommend checking in with your accountant at least every quarter to have them walk you through your financial statements. This is especially important for seasonal businesses like wineries. When your cash inflows fluctuate from month-to-month (hello, seasonal wine club shipments) and your cash outflows are also fluctuating from month-to-month (hello, giant grape bills), it can be tough to figure out if you are actually on track to make a profit--or if you will have any cash left in the bank before the next wine club shipment.
The three main things we recommend checking quarterly are:
Review your profitability
Review your cash on hand and projected cash flow
Check in on your financial targets and strategic plan
Review your profitability
The Profit & Loss statement, otherwise known as the Income Statement, is one of the most important reports you need to review in order to take stock of your winery business's health. Let's go over some of the major things to look at when it comes to your P&L.
First, ensure that your business's books are complete . . . and that your Balance Sheet is reconciled.
It goes without saying that before you review your winery's Profit & Loss, you need to make sure that all of your business transactions have been entered into the books and all your accounts have been reconciled. In addition to reconciling your bank and credit cards accounts, you also need to reconcile key balance sheet accounts: payroll and benefits liabilities, sales clearing accounts, suspense accounts, loan accounts, and sales tax payable accounts. This is where the errors on your books hide! And I am not talking about small errors. It is extremely common for us to help clients clean up errors on the balance sheet that are causing the profit and loss to be off by many tens of thousands of dollars.
If you are not reconciling key balance sheet accounts regularly, you absolutely cannot trust that your winery's profit and loss is accurate.
Second, review your sales by channel
Once your balance sheet is reconciled, it's time to take a look at your Profit & Loss. We'll start at the top by looking at revenue.
You will want to review your revenue by channel: wine club sales, tasting room sales, webstore sales, distributor sales, custom winemaking revenue, etc. How is each channel performing? Do you understand the monthly fluctuations?
I like to review this report in a couple of ways. First, I like to look at sales year-to-date and compare them to the previous year-to-date. You might also want to take sales for the previous 12 months (the rolling-12 period) and compare it to the previous rolling-12 period. This can give you a look at an entire annual period, no matter where you are in the calendar year.
I also like to look at a monthly trends report, which shows the sales for each channel by month. You can get handy at scanning this report to note your sales performance in each channel and to identify any unusual fluctuations. Dig into anything unusual or surprising and find out what's behind the numbers!
Third, take a look at your Cost of Goods Sold (COGS).
Cost of goods sold is a section of the profit and loss that cannot be taken lightly, especially by a winery business or any business where inventory is a material factor.
This section of your Profit & Loss is more complicated than just a listing of everything you have spent on grapes and bottles and corks. Your cost of goods sold needs to reflect the cost of your inventory as you sell it. Only then, will you be able to know the true profitability of your winery.
Your cost of goods sold should rise and fall each month in proportion to your wine sales.
In other words, in months where you run a big wine club, your cost of goods sold should be proportionately high. In contrast, during months when you have high production costs but low sales, your cost of goods sold should be very low. It should not be higher than your revenue! Those high production costs need to be held on your balance sheet and only moved to the Profit & Loss once the wine produced is sold.
If your accountant is only doing year-end wine costing, you will want to work with them to estimate your cost of goods sold each month as a percentage of sales. This number can be squared up at year-end. Ideally, however, you will be calculating out your cost of goods sold monthly, based on your inventory depletions. Doing this will give you an accurate, real-time view of your gross margins and will hep avoid large accounting adjustments at year-end that may swing your profitability wildly in one direction or the other.
Fourth, review your expenses.
Just as with revenue, your expenses should be grouped into logical categories (e.g. wages, marketing, tasting room expenses, facilities expenses, admin and office expenses, taxes and licensing, professional fees, travel and meals). Start with a high-level report: view your expenses in a collapsed format and note which categories have increased compared to last year and which have decreased. Next expand the parent categories and take note of which line items are showing the biggest increases and decreases. Make sure you understand why.
You can also review your expenses in a monthly Profit & Loss format and quicky scan to see how various line items are changing from month to month. Take the time to make a list of any expenses you may be able to cut, subscriptions or services you can cancel, or contracts that you can renegotiate.
Finally, review your bottom line.
For most wineries, monthly expenses are more stable than revenue. This means that you will probably see months with large profits and months with large losses. The goal is to be able to see what these all add up to over a longer period of time. Compare your operating profit for year-to-date against the same period last year (or better yet compare the rolling-12 period with the previous rolling-12 period). Note your change in revenues, gross profit, and expenses as a percentage.
Of course, if your winery business is growing, you will most likely also be seeing increases in expenses. The key point is that your expenses cannot be increasing faster than your revenue (or faster than your gross profit, which should be increasing in line with revenue). Of course, you need to make exceptions for a start-up period, but in general make sure your expenses are never growing faster than your revenues. Don't drive your business into the ground.
Review your cash on hand and projected cash flow
After taking stock of your profitability, it's time to see how your profitability is translating into cash flow.
Without taking the time to build out a complete winery financial forecast, it can be very difficult to see what's on the horizon for your cash. But there is a shortcut we can recommend. Run a Statement of Cash Flows report by month for the previous 12 months. Find the line for "Change in Cash from Operating Activities." This is your net income plus any changes due to non-cash expenses such as depreciation and cost of goods sold, plus changes in accounts payable, accounts receivable, and maybe most importantly, building up inventory. If it's September and you're trying to figure out your winery cash flow for the winter, look how your cash from operating activities performed last year from October to March. On top of that amount, you need to add any amounts you plan to spend on capital investments such as new equipment or buildings, and any amounts you plan on taking as owner draws or distributions.
This will give you a good idea of how much cash you need to have on hand in September to survive the winter. If you don't have this much in your pocket (or available on a line of credit), it's time to get serious about your financial plan, both long-term and short-term.
Again, this is only a rough estimate of cash flow, but it's quick. If your winery is growing quickly, downsizing, or going through other major business changes, you need to take the time to plan out all the financial movements involved and make sure your plan is going to work! Ironically, quick growth is often one of the financially hardest times for wineries as they try to get out in front of their production costs.
Check in on your financial targets
Now that you have an idea of your profitability, your revenue and expense trends, and your cash flow, it's time to check in on your overall progress toward your financial goals.
Ideally, each year you will build out a financial plan that shows how you are going to get from A to B, or from January to December and have more cash in the bank, or at least more equity i your business, at the end than when you started! You can use that financial plan to identify key targets along the way.
We recommend that you set targets for the following numbers:
Revenue growth (%) .
Annual revenue ($). Measure on a rolling-12 basis to track your progress against your annual target.
Labor budget ($). If you don't have a labor budget built out, consider tracking a Labor Efficiency Ratio (LER). The easiest one to track is revenue divided by wages--i.e. how much revenue should you be generating for every dollar spent on wages. This is a concept explored in a terrific book called Simple Numbers by Greg Crabtree.
Monthly operating expense budget ($). Based on your financial plan, identify the average amount you should be spending on operating expenses each month and make sure you are staying close to that number. Any new and unusual expenses have to be incorporated into the plan.
Operating profit (%). We recommend aiming for at least 15% operating profit before interest and at least 10% operating profit after interest. This will allow you enough margin to pay your taxes, yourself, and continue to invest in your business.
If you're not hitting your targets, you will know 1) it's time to start hustling and 2) it's time to revisit your financial plan and get real with yourself.
Quarterly Financial Reviews are also a great time to check in on your overall strategic goals--not just financial goals, but also operational and personal goals. You may have goals for production and product development, hiring and team development, marketing, or for your personal role in the business. Having a sound financial foundation is the only way you will be able to meet these other strategic goals with your business. Quarterly Financial Reviews with your accountant are a fantastic way to make sure that foundation is strong.
If you are current client and would like to make sure you are taking advantage of Quarterly Financial Reviews with your accountant or would like help building a Complete Winery Financial Plan, please reach out to us!
