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Harnessing Data for Tasting Rooms

Harnessing Data for Tasting Rooms

by | May 14, 2020 | Wine Industry | 0 comments

The value of that customer relationship is typically 5-6 times what they spend during their tasting room visit, and it takes some effort to ascertain this value, but this is critical to understanding how much can a winery spends to attract more customers.

Direct-to-consumer sales continually grow in importance for small wineries in the face of distributor consolidation. Wineries now have a greater range of options for eCommerce and POS systems, but few wineries effectively harness all the data they have to grow sales. A good financial team can help capture, organize, and analyze this information to support management and sales to increase revenue.

This data collection and analysis should start even before a guest arrives. Hotels use pace reports to judge how well they are progressing toward their occupancy goals, and tasting rooms should use them, as well. Your tasting room seats are like hotel rooms or seats in a restaurant – if you don’t sell them, you will never have a chance to sell that same seat again. Of course, if you don’t sell a bottle of wine today, you will still have a chance to sell it tomorrow, but you will have missed the opportunity to use that perishable seat to develop another customer relationship.

The value of that customer relationship is typically 5-6 times what they spend during their tasting room visit, and it takes some effort to ascertain this value, but this is critical to understanding how much can a winery spends to attract more customers. If you know the typical customer arriving at your winery is going to spend $3,000 and generate $2,000 in marginal profit over the next three years, you can justify a fairly healthy marketing budget to find more customers.

This process does require a few steps to develop actionable information. The winery needs to track customers over time in order to determine the customer’s lifetime spend. Fortunately, most CRM software will provide sufficient historical transaction data that your accounting team can download the transaction history, clean up the data to provide a year-by-year summary of each customer’s purchases. From this, you can determine a customer’s spend over a certain period. Then, combining this purchase history along with good costing information on the wines the customer has purchased (see previous post on costings), and a good understanding of the operating costs (credit card processing fees, shipping costs not borne by the customer, commissions paid to sales staff, etc.) allows the winery to determine the marginal profit from a customer. That provides guidance on how much a winery can spend to acquire more customers. If the cost of acquiring a customer is less than the customer’s lifetime marginal profit for the winery, the winery will see a steady growth in DTC sales and profitability.

Once the customers are on-site, it is time for the hospitality staff to shine, but the financial team should be helping the hospitality staff refine their efforts by looking at conversion rates, data capture, and order sizes on a routine basis. An aggressive marketing effort to attract more customers isn’t effective if it increases visits, but the staff isn’t capturing visitor data (so you can sell them more wine in the future) and converting them into customers. Given the difference in value between a visitor and a customer, the financial team should be able to help management develop an incentive plan that will reward staff and help the business turn more visitors into customers. In some cases, we have seen simple sales incentives more than double a tasting room’s performance.

Maximizing Profit Through Wine Pricing

Maximizing Profit Through Wine Pricing

by | Apr 13, 2020 | Financial Services, Wine Industry | 0 comments

Most small wineries fail to properly maximize profit when setting prices.

In fact, most wineries evaluate and change their wine pricing too infrequently – a decision to not change wine prices is still a price-setting decision by default.

A good wine pricing exercise needs to be a three-way conversation with sales, winemaking, and accounting.  More importantly, the discussion needs to go beyond just a gut feeling about the market. Most wineries have data to guide the discussion, but it requires some effort to identify and analyze the necessary information, as it is rarely in plain sight.

The sales team can provide a sense of the market’s likely response, but the results from the winery’s most recent price change are likely to be more instructive.  If your accounting team can estimate the price elasticity of demand (basically, a measure of how sensitive the volume of sales is to a price change) for the wines, management can then have a better guide to evaluating the price-volume trade-offs. (Yes, there are some step functions in the demand curves, but management should use data, not gut, to evaluate the actual magnitude of these wine pricing changes.)

Equipped with this price elasticity estimate and the current cost of production, the accounting team can then estimate the total gross profit at each combination of price and volume.  We have seen so many wineries that haven’t changed wine prices in years, but costs have steadily crept up, eroding their margins.  In this scenario, especially when gross profit margins slip below 35%, it is actually much easier to raise total gross profit with a price increase (rather than trying to increase volume).  Furthermore, given the length of wine’s product cycle, the return on capital for growing through volume is often lower than the return on growing through price (but this is a topic for another day).

Conversely, some wineries with very high gross profit margins may be able to increase total profitability through a decrease in wine pricing, but this is actually a rarer situation, so a winery should be very careful and examine the data thoroughly before dropping prices.

Another reason for making small, thoughtful changes to wine prices more frequently, is to develop a deeper data set from which to develop insight to drive a more strategic and profitable pricing strategy.

5 Things to Know about R&D Tax Credits for Vineyards and Wineries

5 Things to Know about R&D Tax Credits for Vineyards and Wineries

by | Mar 15, 2020 | Financial Services, Tax | 0 comments

by Travis Riley, CPA & Partner and Josh Harbin, CPA & Senior Manager – Moss Adams

R&D is often associated with technology and life science companies from Silicon Valley and San Francisco or head less than 100 miles north into the wine country or any other appellation across the United States, and you’ll find the same trend toward innovation being applied to the ancient practices of grape growing and winemaking.

However, many in the wine industry fail to utilize R&D tax incentives offered by federal and state governments. For wineries and grape growers, the potential tax savings could be significant. This article outlines key information to help wineries and grape growers benefit from this savings opportunity.

But first, what is the R&D tax credit?

The R&D tax credit is available to companies developing new or improved products or processes, including software, that results in increased performance, functionality, efficiency, reliability, or quality.

It’s a dollar-for-dollar tax saving that directly reduces a company’s tax liability. There’s no limitation on the number of expenses and credit that can be claimed each year. If the R&D credit can’t be used immediately or completely, any unused credit can be carried forward for up to 20 years (or indefinitely for California tax returns). In addition, previously filed tax returns can typically be amended for up to three years to claim the R&D credit retrospectively, providing an avenue to recoup previously paid taxes.

A new or small business may be eligible to apply for the R&D tax credit against their payroll tax for up to five years starting in 2016. The R&D credit is available both at the federal and state level, with many offering an R&D credit to offset state tax liability.

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To help break down this complex topic, here’s a list of common questions vineyards and wineries have about the R&D credit.

1. How much can a company save with R&D tax credits?

Companies can receive a credit refund of up to 11% of their qualified expenses, depending on a number of factors. Generally, the more a company spends on qualified R&D, the higher the credit they’ll receive, with taxpayers receiving a larger credit if they increase R&D spending year over year.

2. What is qualified R&D?

Qualified R&D ultimately depends on whether the activity meets each element of the four-part test established in the tax code. These criteria include:

  • Elimination of uncertainty. The activity is undertaken to discover information intended to eliminate uncertainty about the capability, method, or design of a new or improved product or process.
  • Process of experimentation. The activity involves one or more alternatives intended to eliminate that uncertainty, and the conduct of a process of evaluating the alternatives (through modeling, simulation, or a systematic trial and error methodology).
  • Technological in nature. The process of experimentation must rely on hard sciences, such as engineering, physics, chemistry, biology, or computer science.
  • Qualified purpose. The activity relates to a new or improved function, performance, reliability, or quality of a product or process.

3. What vineyard and winery activities qualify for the R&D credit?

Vineyards and wineries often aren’t aware that many of the activities they perform—potentially at each stage of the winemaking and grape growing process—could meet this qualification.

Following are some specific examples of R&D activities that have qualified for the credit.

Testing or Evaluation

  • Geological plot characteristics, including soil, water, and climate conditions
  • Rootstocks, varietals, and clones for optimal cultivation in the vineyard
  • Fermentation methods to improve wine quality, flavor profiles, or economic efficiencies
  • Filtration methods to improve wine quality

New and Improved

  • Formulations for vine and soil nutrient management
  • Pruning and training techniques for optimal production
  • Techniques or formulations for pest and disease management
  • Methods to treat harvested grapes prior to sorting and destemming

Design or Development

  • Irrigation systems and water management techniques
  • Trellising systems for the desired canopy
  • Systems, structures, or techniques to improve harvesting processes
  • Automated sorting and crushing processes or equipment
  • Methods or systems to manage wastewater
  • Fermentation methods, processes, or techniques
  • Clarification methods or techniques, including improvements to fining and filtration processes
  • Product formulations for desired flavor or aroma profiles
  • Subterranean wine cave improvements
  • Bottling and packaging processes

4. What types of expenses can be included?

If a company determines the work it’s conducting likely qualifies, identifying related expenses is the next consideration.

Most expenses fall into three categories: wages, supplies, and contractor expenses.

Wages

Qualifying employee wages can include Form W-2, Box 1 or pass-through income subject to self-employment tax. This would include individuals performing qualified research, as well as those that directly support or supervise the research. The rules specify that if an employee is 80% qualified, 100% of their wage can be included to calculate the credit.

Supplies

Qualifying equipment and materials related to the research process can include the following:

  • Some large-scale prototypes and pilot models
  • Tangible property (other than land or depreciable property) that’s used in qualified research, including grapes, fining agents, corks, bottles, barrels, barrel staves, testing supplies, and batches of wine used in experimental blends

Contractor Expenses

Payments to contractors can be eligible, contingent on rules, including:

  • Expenses paid would be eligible if the same services were performed in-house
  • Contractors must be performing an activity that would have qualified if performed by employees
  • The taxpayer must be at risk in the sense that their payment isn’t contingent on the contractors’ results
  • The taxpayer must retain substantial rights—shared rights or greater—in the results

5. What’s the next step to apply for the R&D credit?

Each company’s goals, values, and resources are unique, which makes it important to develop a customized project plan to identify, calculate, and support your company’s R&D credits and activities.

If you think your company may qualify for the R&D credit, the first step is to collect preliminary information about your company’s potential qualified activities. That information is used to develop an estimate of the credit benefit your company could receive as well as identify other R&D-related tax planning opportunities so you can make an informed decision about whether an R&D credit analysis is worthwhile for your company.

With recent increased IRS scrutiny around R&D credits, it’s also crucial to understand what’s necessary to substantiate a credit claim. To learn more about R&D tax credits, see Five Misconceptions about Tax Credits – And If You Qualify or request a credit benefit estimate to see how much your company could save.

Travis Riley is a partner at Moss Adams. He has provided research tax credit studies to companies claiming R&D credits since 2006. He can be reached at (916) 503-8242 or travis.riley@mossadams.com.

Josh Harbin is a CPA and senior manager at Moss Adams. He has provided research tax credit studies to companies claiming R&D credits since 2012. He can be reached at (916) 503-8241 or josh.harbin@mossadams.com.

The Importance of Product-Specific Costings

The Importance of Product-Specific Costings

by | Feb 18, 2020 | Financial Services, Wine Industry | 0 comments

Inventory costings are often an afterthought left to accountants, but they should be a key management tool to drive better decisions. 

Good costings can highlight margins within a product range, and successful businesses make calculated decisions around those findings.  Specific product costs provide insight that supports sales and growth strategies and the strategic deployment of capital.

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 Insightful costings require forethought, effort, and CPA-level experience. It is common that small- and medium-sized wineries don’t have this experience in-house, so they leave costings to their tax accountants at year-end. The tax accountants are usually pressed for time and focused on getting tax filings right. They can get these right with a simple, quick costing, but the winery loses an opportunity to acquire insight into its business.

Simple (and unhelpful for management, but sufficiently accurate for the IRS) costings typically take a variant of the same shortcut – treating all wines alike, and just dividing total costs by total production. (Some may be slightly more detailed, but still suffer from the same principle.) However, we know all wines are not created or made alike.

Fruit costs, winemaking costs, barrel costs, and packaging costs for each wine are different, and management needs to know the specific costs of each SKU.

With this detailed knowledge, management can:

  • Accurately know the true profit margins for each wine
  • Focus sales and production on the most profitable wines
  • Conduct a profit sensitivity analysis while evaluating sales and production strategies for future vintages
  • Evaluate the return on capital used to expand a specific product line

A proper process for each of these topics merits its own discussion, as well, but these management functions can’t be effectively completed without accurate, product-specific costings. We have seen wineries set prices incorrectly (and not maximize profit), waste precious working capital on production on their less-profitable wines, and lose money on wines because they set marketing and programming budgets using a simple average cost, rather than a product-specific cost.

An insightful costing requires advance coordination between management and accounting in order to establish the procedures for tracking each cost item and knowing how to specifically allocate it to a particular product.

To gain insight into costs, establishing a clear tracking procedure is key for management and accounting teams. This will help to track each cost item and understand how to specifically allocate it to a particular SKU. It is always easier, cheaper, and faster to perform a costing when most of the work has been done in advance.  Waiting until after the wine is bottled to sift through invoices with a tax or other deadlines looming is a recipe for average (or worse) results.

What are the differences between a Bookkeeper, a Management Accountant, and a Tax Accountant?

What are the differences between a Bookkeeper, a Management Accountant, and a Tax Accountant?

by | Jan 28, 2020 | Accounting, Bookkeeping, Financial Services | 0 comments

Many of our clients ask us why we talk about bookkeepers, management accountants, and tax accountants, and not just accountants.

A bookkeeper keeps track of all your daily financial transactions and assists in keeping your business organized. Receiving and paying bills, issuing invoices, categorizing expenses, taking inventory, and reconciling bank accounts are some of the daily and weekly tasks that form the core of a bookkeeper’s responsibility.

A management accountant leads the effort to provide insight into your business’s financial performance. Drafting budgets, tracking actual performance against budget, reconciling balance sheets creating cash flow forecasts, and performing inventory costings are among the duties of a management accountant to assist you in making decisions for your business.

A tax accountant provides a very specific service to calculate your taxes, minimize your chance of an audit, and guide your strategy, particularly when acquiring or selling a business or investing in assets, to minimize your potential tax liabilities.

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Bookkeeping is More Than Just Crunching Numbers

While bookkeepers do a fair amount of data entry and receipt tracking, the heart of the process is labeling expenses, indicating which suppliers you paid and how much, as well as keeping a record of receipts. Your bookkeepers may also do double duty in payroll and work to prepare and issue invoices.

Even though bookkeeping work can be notably detailed, bookkeepers can be the foundation of surviving an audit. Business deductions are a huge IRS tax audit trigger. They set off alarms, which can be silenced with legal and meticulous record keeping.

What a Tax Accountant Does

Accountants perform a variety of accounting functions and are typically certified by national and professional associations. Accountants must a have a four-year college degree in accountancy. And additionally, depending on their specialty, they may have to spend up to a year earning a certification in their home state.

Tax accountants provide specialized tax advice. They calculate tax liabilities and provide strategies for legally lowering their clients’ tax liability. Business tax accountants typically have advanced degrees and help their clients with high-level strategic financial decisions.  Senior-level tax accountants take more of a theoretical approach to their clients’ overall tax strategy, helping with business plans, individual financial plans—trusts, etc.—with the goal of taking full advantage of the tax code.

What does your business need: a Bookkeeper, a Management Accountant or a Tax Accountant?

In our opinion, small businesses such as wineries need all three, and should seek specialists in each field.  Tax Accountants and Management Accountants can do your bookkeeping, but they are over-qualified, and you would be paying too much, as bookkeepers are the least expensive.  However, bookkeepers need oversight, and a good management accountant can oversee and check a bookkeeper’s work to ensure accuracy, and then provide additional insight (that a bookkeeper isn’t trained to furnish) into your business to help you make better financial decisions.

Tax accountants are typically more expensive than management accountants, and their focus is on creating an accurate tax return that will minimize your tax liabilities and risk of an audit.  They are more focused on providing an accurate report to the government than on developing recommendations for you to operate your business more efficiently.  Management accountants are focused on helping you operate your business.

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We match our solutions to the needs of the customer. Do your bookkeepers need extra help during end-of-year closeout?  Is your tax accountant asking you to assemble better financials in order to reduce the time they have to spend preparing your return?

Protea Financial can support you with everything from bookkeeping services, order processing and inventory tracking to handling management accounts and tax schedules in order to support your tax accountant prepare your year-end financial statements. Protea’s goal is to provide, at costs below the market average, timely, accurate, and high-quality financial information on which a business can act.

We can work with you to provide an evaluation and find the best solution for your business.