The biggest challenges of winery accounting (and how to solve them)
A lot of wineries, and businesses in general, are experiencing a shaky state of the industry right now.
Inflation rates are high, costs have gone up, margins are tighter, and growth in wine sales has generally plateaued.
In a time when every dollar counts, it’s a good time to sit back and focus on your winery finances just that little bit more. Let’s talk about a few of the wine industry’s biggest accounting challenges and a few ways that you can overcome them to simplify and improve your own financial goals.
Why is winery accounting so challenging?
First things first, let’s talk about why winery finances are so challenging.
To be frank, complexity is just an innate part of this industry. The manufacturing and production elements of the industry are very nuanced. And a lot of cash is tied up in various long-term commitments. But the accounting for the long production cycle is also very complicated and nuanced.
Adding to the challenge is the fact that it’s hard to find information on best practices around these things. Everyone seems to have their own methodology.
From what we’ve seen over the years, there are four main buckets of challenges that wineries tend to face:
Poor cash flow management, or not really understanding the cash needs for growth
Inaccurately tracking how much it costs to produce your wines
Ineffective coordination across departments internally
Unsuccessful collaboration with your finance partners
So let's kick things off with the number one mistake.
Poor cash flow management
Cash flow management is a huge challenge for wineries, due to the unique characteristics of the wine industry.
Unlike other businesses, the wine business is not a cash flow business, it is a cash intensive business.
The industry is quite unique in the sense that it has a really long inventory carry, a much longer inventory pipeline than most other industries do. So, while the profit and loss statement (P&L) might look good, with profits showing up, your actual bank account can paint another picture.
Why? Because most of your money is tied up in wine inventory that's aging in your cellar.
This leads us to one of the biggest mistakes we see wineries make: underestimating how much cash they need to keep growing.
Let's look at an example:
Imagine you're expanding your winery by 25% each year. If you're selling wine within a short time, like 24 months, you'd actually need to create 56% more wine inventory this year than what you're selling in order to keep up with growth. This means you need way more cash to make all that wine than what you are getting from sales.
In the case that you have a longer production cycle and a three-year turnaround on your wine inventory, that 25% growth rate means you need a whopping 95% more cash right now to invest in production when compared to your current sales volume.
Some wineries think they can solve cash flow issues by selling more wine faster. But here's the catch: the faster you grow, the more cash you need upfront to make all that wine.
So, what's the solution? If you're growing, you should be thinking about your cash needs over a three-year period at a minimum. This is essential to cash planning, especially during growth spurts.
On the flip side, some wineries prioritize long-term goals over immediate profitability. They might not focus on making big profits right away because they're building a strong brand or investing in their vineyard. Still, even if profitability isn't your main focus right now, you need to manage cash flow to pay your bills and keep your business running while you grow.
Inaccurate Cost Accounting & Cost Tracking
When it comes to managing finances in the winemaking business, accurate accounting is vital.
And two of the most common places we see errors in data are in cost accounting and the tracking of the Cost of Goods Sold (COGS).
Inaccurate Cost Accounting:
One common challenge we see for wineries is not recording enough details during financial transactions. This typically starts at the basic transaction level, where important information about costs and quantities often gets overlooked.
For instance, when dealing with invoices, it's crucial to break down all the specifics, like how many gallons were processed and the exact products involved. This detailed data is essential for accurately tracking expenses.
To fix this, focus on collecting more comprehensive information whenever financial transactions occur, whether it's in software like QuickBooks or any other accounting system.
The idea is to gather enough transaction insights to precisely allocate costs. It begins with making a conscious decision to adopt a more detailed cost accounting approach.
This means paying attention to all cost elements, including indirect expenses like labor, occupancy costs, and utility expenses related to production.
These costs need to be properly distributed to determine the actual cost of goods.
While some may argue for expensing production costs for tax benefits, it's vital to maintain a separate accounting set for management purposes following Generally Accepted Accounting Principles (GAAP).
This standardized method offers an accurate view of a winery's financial status and ensures transparency for lenders, investors, or potential buyers.
If you need more help with cost accounting, we’re always here to help. You can get in touch with us over on the Getting Started page and we’ll see how we can assist.
Precise Cost Tracking and COGS:
Now, let's relate this to the precise tracking of the Cost of Goods Sold (COGS).
Your COGS represents how much it costs to make each bottle of wine.
Unfortunately, many wineries encounter problems in this area, which can result in inaccurate financial records and potentially harm profits.
Imagine this: Your Profit and Loss (P&L) statement shows impressive profits, making you feel financially secure. However, if you're not accurately tracking your COGS, this positive image can be deceiving.
The issue arises from the complexity of winemaking expenses. Costs are spread across various stages, from acquiring grapes to bottling and aging. If you don't meticulously assign these expenses, your financial statements won't truly reflect how much it costs to produce each bottle.
So, what's the solution?
Wineries can benefit greatly from implementing reliable cost-tracking systems. Consider investing in specialized accounting software to help. The software platform that we like best is Innovint.
These tools help you accurately allocate expenses, ensuring that all production costs, including materials, labor, and overhead, are factored into your COGS calculation.
By doing so, you'll gain a clearer understanding of your production expenses, allowing you to make smarter decisions about pricing and production volume.
Ineffective Team Coordination
We’ll quickly run through this next challenge as it’s not entirely accounting-based. But still equally important for the success of your winery goals.
We’re talking about internal team coordination and cohesion.
We often see winery teams working in complete isolation of each other, without proper communication and cooperation, and as a result, see financial goals fall off track.
For example, if the team responsible for selling wine directly to consumers (let's call them the DTC team) and the team handling wine production don't really talk to each other, a lot of resources can be wasted and mistakes can be made.
The DTC team might decide to launch a big marketing campaign to sell a new wine, but they haven't checked whether the production team can meet the volume first.
On the other hand, the production team might be making wine that the DTC team hasn't planned to sell, resulting in excess inventory.
Additionally, opportunities can be missed when teams don't work together.
Imagine if the marketing team discovers that customers really love a specific wine, but they don't share this insight with the production team. The production team might continue making other wines that aren't as popular, leading to missed sales.
We encourage our winery clients to have regular team meetings to share information with one another to ensure everyone is on the same page.
Furthermore, using a software tool that allows you to access financial data in real-time can also help.
For instance, if the production team notices they can make more of a popular wine, they can immediately inform the DTC team so they can adjust their marketing efforts.
This way, everyone works together efficiently, reducing waste and taking advantage of opportunities for growth and profitability.
Unsuccessful Collaboration with Finance Partners
Last but not least, a huge problem we see across wineries is a lack of communication with financial partners, whether it’s an accountant or financial advisor.
Remember, your financial partners are here to help you meet your business goals and everyone needs to be working together towards the same goals.
If you’re focused on long-term brand-building as a winery owner, yet your accountant is only focused on increasing profitability, you may have a disconnect that results in conflicting priorities and decision-making.
Share your long-term goals and objectives with your accountant to ensure that they align with your financial strategies.
If you’re in search of an experienced winery accountant, we’re always here to help.
You can get in touch with us by heading over to our Getting Started page and answering a few questions.
In the meantime, check out this blog post about profit planning, we think you’ll find it useful!
Until next time.
