Planning for Winery Operations

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Planning for Winery Operations

• Where Has All the Money Gone
• Long time Passing

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Planning for Winery Operations

• Where Has Will All the Money Gone Go
• Long time Passing
• Next Five Years

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5 Year Annual PlanAssumptions

• Limit the number of assumptions
• Operating (12)
• Production (32 including 20 Expense Lines)
• Annual property additions useful lives
• Financing (8)
• Opening balances
• Assumptions can be saved and recalled using the
  Excel scenario manager

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5 Year Annual PlanFeatures

• Includes - Income, Cash Flows Statements, Balance
  Sheets, Production Costs, and Financial Ratios
• Provides for financial variance analysis
• Two sales channels (Retail and Distribution)
• Three wine products (12, 24 and 36 month
  products)
• Cash flow v. growth in sales production
• Facilitates an understanding of the basic
  structure and methods for preparing a financial
  forecast for a winery operation.

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Built-In Assumptions

• Model is sales based, NOT production based.
  Production requirement in excess of vineyard
  capacity is made up with purchased grapes.
• New barrels are used for one year for a 12 month
  white wine product (Chardonnay?), then
  transferred to the Used Barrel program.
• 24 and 36 month products are red wines and used
  barrel aged.
• Barrel life of 5 years with split depreciation
  schedule.
• Case cost of wine sold is prior year production
  cost not exactly correct, but close enough
• Current year bottling equals next years case
  sales also not exactly correct, but

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Sample Aging and Barrel Program Table
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Forecast Assumption Groupings

• Base Operating (Sales, Growth and Operating
  Expenses)
• Production (Cost of Goods)
• Capital Budget (Depreciation and Property
  Equipment Purchases)
• Financing (Interest Expense, Credit Lines and
  Long Term Debt)
• Opening Balance Sheet

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Base Operating AssumptionsEnter Data in
Light-Blue Shaded Cells
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Production Assumptions
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Capital Budget
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Depreciation

• Departmental allocation for depreciation expense

• Opening balances of accumulated depreciation

• Barrel additions are computed based on barrel
  type (New or Used), aging and volume

• Barrel depreciation is computed using a split
  schedule

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Departmental Allocations
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Financing Computations
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Balance Sheet Opening Balances
Opening Balances from the Capital Budget
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Results and Analysis

• Operating Forecast
• Analysis of Channel and Growth Effects
• Production and Case Cost Accounting
• Inventory Movement
• Gallons in Production
• Bottled Case Goods
• Cash Flows
• Balance Sheets
• Ratio Analysis
• Graphs and Charts

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Operating Forecast
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Additional Operating AnalysisOperating
Percentages and per Case Analysis
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Income Data TableCase Sales v. Retail

• Most small wineries sell 20 to 30 retail
• The analysis below was prepared using the demo
  model and an Excel 2-way Data Table.

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Production Forecast The Boot Strap Method

• Start with Anticipated Sales
• Then estimate gallons in process
• Make reasonable assumptions on what it will take
  to support future sales
• Compute inventory movement
• Gallons in the cellar
• Bottled goods
• Once you know crush requirements then work
  backwards to compute grape purchases etc

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Inventory Movement
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Wine Production5 Year Comparative Forecast
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Costs of Wine Sold

• Wine production involves the following cost
  types
• Barrel (Standard Unit Gallon Month)
• Cellar (Standard Unit Gallon Month)
• Bottling (Standard Unit Case Equivalents)
• Grapes Bulk Purchases (Std. Unit - Tons
  Gallons)
• Crop (Standard Unit Acres)
• Harvest (Standard Unit - Tons)
• Crush (Standard Unit Tons)
• Each cost type is a cost center

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Production Costs Year 1
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Wine Costs Flow

• Production costs are charged to wine-in-process
  inventory accounts
• When bottled, wine-in-process is converted to
  finished goods inventory
• Cost per case equivalent is calculated.
• As wine is sold, the case cost is deducted
  (credited) from finished goods and charged to
  COGS.

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Simple Concept but Complex Implementation
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Vintage Costing Sheets

• A Vintage costing sheet should be completed for
  each product.
• A preliminary costing is completed when the
  product is placed in production this is used
  for costing and planning.
• After bottling, complete the final vintage
  costing sheet this is used to document your
  case cost and establish reporting standards.

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Typical Vintage Costing SheetPage 1
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Typical Vintage Costing SheetPage 2
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Operating Expenses

• Retail Selling Expenses (Cost per Case Sold)
• Distribution Selling Expenses (Cost per Case
  Sold)
• Marketing ( of Sales)
• General and Administrative ( of Sales)

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Selling Expense Retail(About 50.00 a Case
Sold Plus Annual Increase)

• Wine club administration
• Tasting room operations
• Corporate and other direct sales efforts
• Retail and broker commissions
• Shipping and handling
• 30 to 50 of IT Costs
• Credit card fees

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Selling Expense Distribution(About 25.00 per
Case Sold Plus an Annual Increase)

• Travel Entertainment
• Collateral Sales Cost
• Sales Salaries Commissions
• Sales administrative support
• Shipping and Handling
• 20 to 30 of IT costs
• Samples

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Marketing Expenses(Budget About 10 of Sales)

• Web Site
• Newsletter
• Promotional expenses
• Prospecting costs
• Public Relations
• Video Pod Casts
• Label design Branding

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General and Administrative Expenses(Budget Fixed
Amount Plus an Annual Increase)

• 20 to 50 of owners/CEOs salary
• Finance salaries
• Bookkeeping Independent accountant
• 20 to 30 of IT
• Human resources
• Directors expenses
• Legal costs
• General business consulting
• Fees Excise Taxes

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Cash FlowIncome is NOT Cash

• Adjustments to Income to Derive Cash Flow
• Changes in Accounts Receivable
• Changes in Inventory - Finished Cases
• Changes in Inventory - Wine in Process
• Add Depreciation
• Deduct Purchases of Property and Equipment
• Changes in Accounts Payable Accrued Expenses
• Changes in Income Taxes Current and Deferred
• Adjust for Capital Contributions and
  Distributions
• Adjust for Changes in Debt
• Deduct Principal Payments on Debt

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Adjustment Computations
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Cash Flow Statement

• Three Sections
• Cash Provided by (Used in) Operations
• Cash Provided (Used in) Investment Activities
  (See capital Budget)
• Cash Provided (Used in) Financing Activities (See
  financing assumptions)
• In the Long Run, to survive all business must
  generate cash from operations.
• Cash Flows from Operations is presented using
  both the direct and indirect methods.

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Cash Flow Statement
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Cash Flows Balances
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Forecast Cash Flow v. Growth

• Growth requires cash resources
• The table below summarizes the cash flow effects
  of varying percentages of year-over-year growth

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Analysis of Key Financial Statistics v. Sales
Growth
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Inventory Levels v. Year
Addition Inventory Requirement - 1.5 to 2.0
Million
5 Annual Case Sales Increase
25 Annual Case Sales Increase
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The Balance Sheet

• Snapshot of financial position
• List of assets at historical values
• Cash flow components represent net change in
  balance sheet accounts
• Flow of forecast information
• Sales Production
• Operations
• Cash Flows
• Balance Sheets

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From Cash Flow to the Balance Sheet
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Balance Sheets
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Ratio Analysis
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Capital Employed
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How to Improve Operating Cash Flow

• Slower Sales Growth
• Move to shorter term wine products (e.g. whites)
• Get Better Margins
• Increase sales price
• Sell into higher quality programs generally
  higher price wines also have better margins
• Increase your retail sales efforts
• Lower Taxes LIFO, Property tax review,
  reorganization etc
• Lower expenses
• Rip the vineyard build condos

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Forecast Considerations

• Your forecast should have the same nomenclature,
  classification and organization as your
  accounting records.
• Include all your main product groups. The 12, 24
  and 36 month groupings used here were only for
  illustration purposes only.
• Modify the model to reflect your barrel program.
• Monthly production based forecasting is more
  accurate, but much more complex and costly to
  implement.

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Downloads Available

• URL http//alondon.com/VW.htm
• Click on Wine Education Button.
• Download this slide show.
• Download Excel Simple Winery Forecast workbook.
• Download Winery Accounting Flows .xls A
  complete accounting system scheme for a winery.
• Take a look at the more complex VIRTUAL Winery V3
  forecast system (120 month forecast, with 8 cost
  centers and 7 sales channels, unlimited wine
  products) also available for download.