How to create a winery budget for 2024
It's that time of the year when you need to roll up your sleeves and work on your budget for 2024.
We know it’s not everyone’s favorite activity, but with a few tips and really great software, it might actually become something you enjoy.
We said might!
As experienced winery accountants, we’ve done a few (hundred) budgets over the years. And while there's no one-size-fits-all approach to budgeting, we've got a few tricks up our sleeves to make the process smoother.
So, pour yourself a glass of wine and let’s get started.
Here are a few tips and ideas that we think you might find useful.
Start with good forecasting software
First, it’s important to work with good forecasting software.
We like Fathom, and use it with our clients. It’s a great tool because it can build out forecasts based on lots of different rules—an average of the last 12 months, the same as last year but with a 10% increase or decrease, etc., so you have a lot of flexibility.
It also pulls information directly from QuickBooks Online, so you’re always working with accurate historical data.
This means you don’t need to pull out old receipts or go browse your P&L. The information is already there in Fathom, ready for you to manipulate.
When working with our clients on their annual budgets, we start out with this forecast from Fathom and go line by line:
Sales Forecast:
Let's talk about wine sales first. The general rule here is to look at historical trends, consider any proactive changes you are making to your strategy, try and get a sense of which way the winds of the economy are blowing, and then don’t be too optimistic.
You can always run scenarios with greater sales goals, but it’s good to start with a realistic scenario.
So if your sales increased 10% last year, maybe they will grow by 10% again. If they decreased by 10% last year, do you think you can flatten them out and set a baseline goal of “same as last year.”
When it comes to motivating your sales team, yes, set goals. But when it’s time to set the budget, you might be happier if you “under-promise and over-deliver”
I would also suggest that you look at sales by channel and forecast each separately. You may be seeing flat tasting room sales, but seeing very good growth in your wine club and online sales channels.
Wine Cost of Goods Sold (COGS):
Next up, the cost of making your wine. If you have solid wine costing workbooks, you may be able to forecast the depletions for each wine in your portfolio, the cost of each of those wines, to get a total wine cost of goods sold.
While that’s a useful exercise for inventory and production planning, we find it more practical at this point to use a simple percentage of revenue to forecast your cost of goods sold. Unless you have been seeing some wacky trends, use the same gross profit margin percent as last year, and then back into your cost of goods sold.
Step 1: Find your gross profit margin % by looking at last year’s financials:
Gross profit margin % = gross profit / revenue.
Step 2: Calculate the cost of goods sold for your budget.
Projected cost of goods sold = projected revenue x (1 - gross profit margin %.)
Expenses:
Now it’s time to go through your expenses line by line and look into your crystal ball.
You will find some of your expenses are relatively fixed costs, like rent and utilities. We generally sent these to match last year’s numbers, with an increase of 2 or 3% to account for inflation and other cost increases.
You will also find that some of your expenses are tied to another number on your financial statements. Merchant account fees and excise taxes, for instance, should be calculated as a percentage of revenue. Payroll taxes and benefits can be calculated as a percentage of wage and salaries.
Speaking of wages and salaries, we find it useful to create a separate payroll forecast, with a line for each employee (or group of employees, for instance, if you have a lot of part-time tasting hosts.) Think about how many hours each employee will work and account for any wage increases. Once you have worked out your line-by-line payroll forecast, you can add the totals back into your master budget.
For some expenses, you will have a number in mind. For instance, if your monthly software costs or insurance costs increased recently, you should project out the most recent cost, maybe with a bit of an increase, rather than just relying on “same as last year.”
Some of your expenses, such as office supplies or maintenance and repair, generally occur irregularly throughout the year. There are two ways you can handle these. You can do “same as last year” with a built-in increase. Or you can take the total projected expenses and spread them out evenly over the months of the year. In neither case will you get the timing exactly right so the preference is up to you. Just make sure you don’t budget zero in these categories just because you can’t foresee right now what costs you might incur.
The bottom line
Once you have worked through your sales forecast, cost of goods sold, and expenses, you will be able to see how your bottom line looks—your net profit.
Your goal is to make sure your sales forecast and expense budget play nicely together. If you get to the bottom line and you don’t like what you see, you'll need to adjust either your expenses or your revenue to make things work.
If you are a growing winery, you may have difficulty finding a profit, even on paper. If that’s the case, it’s time to do some break-even planning and set some goals. What does your revenue need to be so that you can cover your expenses?
In other words, solve for profit! We recommend choosing a target profit goal for next year and working backward from there. Let’s take a look at what that would look like.
Scenario planning for profit
We created a Winery Profit Calculator that can help you figure out what your sales goals should be so that you can hit your target profit. You can also use the calculator to do a true break-even calculation and just start with a target profit of $0. Once you have your goal in mind, you will be able to work backward to see what you need for gross profit and from there to see what you need for revenue and for case cae sales.
Keep in mind that your gross profit is what covers your expenses and your profit. So in a true break-even scenario, your gross profit would be equal to your expenses. If you have a profit goal, then your gross profit would be equal to your expenses plus your profit.
With the calculator, we are starting with profit and expenses, and generating a goal for gross profit. Once you have your gross profit target in mind, then you can use your estimated gross profit margins to calculate the revenue that you will need. In the end, you’re left with a revenue goal that will allow you to effectively take home the target profit you set in the beginning.
Just keep in mind that as you're thinking about increasing sales—whether it's through online channels, distribution, or a new venture—that additional sales may increase your operating expenses, in addition to your cogs. You may need to allow for additional sales staff or other expenses in your plan.
Cash vs Profit
Now here’s the kicker: even if you have created a budget for a profitable year ahead, you can’t stop there. Your profit does not equal your cash flow. If you are a growing winery, you will be putting money into equipment and building up your inventory, and you can have very negative cash flow while still showing a profit. If you are on the other end of things, looking toward retirement and winding down production, your business will likely start throwing off a lot of cash, even though it is showing negative operating profit for the year.
You also have to account for cash that is used for things not included in the profit and loss. The big ones are capital expenditures, paying down debt, paying flow-through taxes, and distributions to owners. Budgeting your profit and loss is a good first step, but it’s not the final step.
Take a collaborative approach
It’s important to note that tackling your winery budget and cash flow projections should be a team effort between you and your accountant. There is a lot of heavy lifting that your accountant and software tools can do, but a few of the finer details can only come from you, the business owner.
Here at Northwest Wine Accounting, we are happy to get things moving by creating an initial budget based on historical trends, but we rely on client input to fine-tune our scenarios and make our budgets as realistic as possible. If you would like help working out a complete financial plan for your winery, a plan that includes an operating budget, a production budget, and a projected cash flow statement, reach out!
Our final tips for your budget
As a last tip, we want to encourage you to not get hung up on the budget. Creating a budget is a useful exercise and gives you a baseline to track against. But once you have learned to budget, you will want to learn to forecast and learn to keep an updated forecast, so that you are always looking forward, not just backward.
Until next time.
