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What Goes Into the Cost of a Bottle of Wine

What Goes Into the Cost of a Bottle of Wine

You may not have thought about this, but it is a common question among winery and vineyard owners, not to mention wine aficionados. Customers always ask vineyard and winery owners why wine is priced the way it is. If you have ever wondered how your favorite bottle of wine is priced, or you are thinking about changing the price of your wine, here is a go-to guide on wine pricing.

 

The Cost of the Grapes Themselves

One of the largest expenses wineries have when they make a bottle of wine is the cost of the grapes themselves. Each grape variety has a price tag, usually measured in tons. For example, the Caberlot grape, an extremely rare wine grape that is only cultivated in one area of France, is extremely expensive to purchase. By comparison, the Pinot Grigio grape is much more cost-efficient, not to mention versatile. No matter which grape variety you use, a lot of wine can come from a ton of grapes. Wineries can make about 2 barrels of wine from one ton of grapes, which equals 720 bottles of wine from one ton of grapes.

Of course, when you buy grapes by the ton, you aren’t just paying for the grapes. You are also paying for the cost of growing the grapes, including the grape seed, organic fertilizers and pesticides, the labor needed to harvest the grapes, and even the startup costs for grapevines. Since it can take up to four years to produce the perfect wine grape from the original grapevine, it’s no wonder a ton of grapes isn’t cheap.

 

The Cost of the Barrels and Tanks

Wine production can’t happen without wineries aging the wine in barrels or barriques. Whether you call them barrels or the French barriques, your winery has to pay for the wine to age. The cost of the barrels used to age wine vary depending on the type of wood used, and each winery has a preference for which wood ages wine the best.

In many areas of wine production in the United States, white oak is used for wine aging barrels because it is porous and works to age wine quickly. However, winemakers may prefer several other kinds of wood over white oak to age wine, such as hickory, redwood, maple, French oak, walnut, cherry, or chestnut. All of these types of wood may be used by wineries for aging, and each wood adds flavor properties to the wine. For example, a winemaker may love the redwood barrel for aging wine because it adds a note of dark spice especially coveted by some red wine drinkers. No matter which type of barrel you choose, you’re going to pay a pretty high price for a barrel. French oak barrels are extremely expensive, with some barrels made from French oak selling for $3000.

Fermentation tanks for wine is also an extremely viable solution in terms of aging your wine. These tanks are typically controlled by a computer to give each batch the ability to stay at a previously regulated temperature. While Stainless Steel tanks are going to be more expensive than a traditional barrel, the fact that they tend to deprecate slower, easier to clean, and allows you to roll the deprecation costs into your bottles of wine at a much more accurate rate.

Protea Financial Wine Barrels

 

The Costs of Wine Production

Winemaking doesn’t end with the barrel, of course. There is a lot to be done once the wine finishes aging in the barrel. You have to figure in the cost of personnel needed to bottle the wine and those costs of production.

Wineries have to have machinery for bottling the wine or, in some instances, personnel to bottle the wine. All of those production costs which is going to include:

  • Labor costs for employees of the company
  • Utilities
  • Building costs such as rent, lease, or mortgage payments as well as maintenance.

For some companies, the points mentioned above might not apply, especially if you have a wine making agreement with another company or manufacturer. In these agreements, you’ll typically be charged a flat monthly rate or a per gallon rate to produce your wine, making it easier to incorporate that cost into your per bottle pricing.

Wine production costs can vary greatly depending on the size of the winery. If you have a small vineyard of about an acre, you are bottling around 720 bottles of wine each year. Your wine production costs will be much smaller than a huge winery with tens of thousands of acres of grapes to pick, age, and bottle. However, you cannot always assume the larger production of wine equals less expensive wine. There are small vineyards where more expensive grapes are grown, and the wine is small-batch, but the cost of the bottle is extremely high because the wine is in demand. Demand for a particular wine vintage can drive up wine pricing.

 

Bottling Costs to be Considered

There is so much that goes into bottling wine that each area that oftentimes some aspects of it get overlooked or estimated so hastily that you be losing out or wasting money. 

Glass Bottling

Besides production costs, wine pricing includes the price of the wine bottle. Wine bottles have been used for centuries to bottle wine. Usually, winemakers favor clear glass or green glass for making bottles. Of course, the fancier the bottle, the more expensive the wine will be. Pricy crystal wine bottles have been used for aging expensive wine. Also, more expensive wine bottles have a thicker glass with indentations on the bottom of the wine bottle for better aging. The most important factor for wine bottles is their ability to keep out oxygen so the wine can be flavorful for decades.

 

Closures

The tree bark used to make corks is nearly as old as the bottles themselves. Like wine barrels and bottles, many winemakers favor particular types of cork. Most winemakers favor oak corks, but specialty winemakers would rather have French oak or redwood corks. This doesn’t even include synthetic options that are available. The fact of the matter is, with the large variety in closure options available and how each type can affect your wine, this pricing segment typically gets special consideration.

 

Labeling

Wine labeling can also be pricey, depending on how much the wine labels cost to produce. Also, you most likely did not come up with the label yourself. One aspect of marketing that is often overlooked is branding with labels. You have to come up with a visual representation of your wine brand. Simple black and white wine labels are the least expensive, while full-color, gold-edged wine labels are the most expensive.

Protea Financial Cost of Grapes

Other Costs You Need to Consider

Just because you have figured out the costs of wine production so you can price your bottles doesn’t mean that is the price your customers actually pay for that bottle. If you only price your bottles for sale in your winery, you don’t have to worry about the differences between wholesale and retail margins. However, when you sell your wines to liquor stores and restaurants, you need to understand your wine bottle will undergo a markup. The wholesale price markup is usually your profit margin, and the retail price markup represents the profit margin for the store or restaurant. Usually, there is between a 30% and a 50% markup for a bottle of wine. If you sell a bottle of wine to a retailer for $20, it will most likely sell for $30 to $35 a bottle at a liquor store.

Restaurants and bars also mark up bottle prices, whether they sell the wine by the glass or bottle. In fact, a glass of your wine at some restaurants could be as much as the wholesale price of the bottle of wine. Both wholesale and retail pricing for wine depends on the demand for the particular wine vintage.

 

How Should I Price My Wine?

It can be challenging to price a bottle of wine from your winery. You have put your heart, soul, blood, sweat, and tears into your passion for winemaking, and you want to price the wine according to the effort. However, when you price a bottle of wine, you need to consider a number of factors. All of these questions translate into numbers for wine pricing for your business.

  • How much did the wine production cost?
  • How much did the wine cultivation cost?
  • Is the wine vintage in demand, or is it exceptionally a rare vintage?
  • Is the wine small-batch aged?
  • How much did marketing and sales cost you?
  • Who do you primarily sell to?
  • Is your vineyard and winery in demand?
  • What type of grapes did you use?

 

For Additional Help Costing Your Wine Contact Protea Financial Today

Many factors go into pricing a bottle of wine, and it can be complicated to determine a pricing strategy for your wines. The numbers can float around your head in a confusing swirl of numbers. However, keep in mind that pricing should not be an emotional issue, no matter how much love you put into the bottle. You need to make sure your pricing strategy is based on solid numbers. If you need help pricing your wine for sale on the wholesale or retail market, you need to consider Protea Financial. We have bookkeepers, accountants, and inventory managers who understand the vineyard and winery business because that is their specialty. When you need help with the financial end of accounting and bookkeeping, we can help get you organized and help you reach your business goals. Contact Protea Financial today.

Protea Financial Can Make Figuring Out the Cost of a Bottle of Wine Easier

Costing out a bottle of wine can be a complicated endeavor. Turn to the financial experts here at Protea Financial today and let us help! 

Costing Methods for Wine

Costing Methods for Wine

As a winery owner, you are probably far more concerned with wine production than wine pricing. That’s understandable because if the wine isn’t good, it won’t sell regardless of price. However, you need to get a fair price for your wine to recoup your production costs and stay in business. Wine pricing can be tricky. To ensure you have priced your wines at a price point that will both make you a profit and sell your wine, you need to understand costing methods. Here are the most common costing methods and which costing methods are appropriate for wineries to use.

 

Important Definitions

Before we can begin discussing costing methods for wineries, you need to understand the cost definitions for product producers, including wineries.

A fixed cost is easy to understand. Fixed costs are costs that do not change from month to month. Fixed costs include rent or mortgage on the winery buildings and land. Taxes, such as employee payroll taxes and property taxes, are also examples of fixed costs. Usually, you know exactly how much your fixed costs will be. You receive notices for property taxes yearly, and state or federal governments designate payroll taxes.

While fixed costs are the same for months or even years, even fixed costs change over long periods. Your property taxes will eventually rise, for example. But generally, fixed costs do not change month to month. If this is confusing, you can keep in mind that fixed prices don’t change with an increase or decrease in your wine production.

The opposite of fixed cost is a variable cost. Variable costs vary by the number of products you produce. Usually, the more wine you produce, the higher your variable costs will be. For most wineries, the highest variable costs are materials costs for wine production, such as barrels, corks, bottles, and labels. While your fixed costs will not change monthly, your variable costs will change monthly.

Total cost is much easier to understand. When calculating your total costs, you are adding all of your fixed and variable costs together to come up with the total cost of production.

You’ll need two more definitions of cost before we move on to costing methods for wine. There are direct and indirect costs of production. Direct costs are the costs of all the materials involved in the production of the wine, as well as the cost of labor you have used to produce the wine. An example of a direct cost would be the salaries or hourly wages you pay your bottlers at the winery.

Indirect costs are sometimes referred to as overhead. An example of indirect costs would be the utilities for the winery. Those utilities would include the electricity for your bottling area and a wine-tasting room with a retail outlet. Because the utilities are for the entire operation, rather than just the bottling area, they are counted as an indirect cost.

 

Types of Costing Methods

Now that you understand the costing method definitions, we can talk about a couple of common costing methods for wine that you should be aware of.

Protea Financial Standard Cost Model

Standard Costing

Many wineries use the standard costing method. Standard costing is excellent for companies trying to establish a workable budget. In standard costing, businesses make estimates for their production costs. Fixed costs are easy to estimate because they don’t change from month to month. Direct labor costs, such as payroll, are included in the production costs. There are variable costs as well within the standard costing method. The cost of materials is the most important variable cost that needs to be estimated in the standard costing method.

Using the standard costing method will be easier if you have been in the winemaking business for a while because of the variable costs. It is much easier to estimate costs for your wine bottles each year if you have been buying them for years for your winery.

There are advantages of the standard costing method. First, standard costing is very efficient. Using the per case method, you can look at the estimated projected costs for your business for an entire year on one simple sheet. Also, standard costing allows you to manage your business budget more effectively because you will be able to check monthly if your expenses are staying close to the budget or if the expenses are constantly running over budget.

Many wineries use the standard costing method for several reasons. First, because many wineries sell wine by the case, using the standard costing method simplifies the accounting and budget process. The numbers in standard costing are easy to understand. Also, the accounting costs for wineries when they use the standard costing method is less expensive. Finally, using the standard costing method allows wineries to analyze the difference between the actual costs of the wine and the standard costs predicted for the year. A year-end examination allows wineries to dig into what led to the variance between costs so that they can produce more accurate costing methods each year.

 

 

Specific Item Costing

In addition to standard costing, many wineries also use specific item costing. In specific item costing, costs of production are accounted for in each bottle or case of wine. If you own a small winery, specific item costing may be perfect for your business. Specific item costing is also great for wineries with high-dollar values or vintages. 

For example, when you price a case of wine or a bottle of wine, you use the item number to assign all the costs that figure into the price of the case or the bottle. So in that bottle of wine, you have all the direct costs (materials, labor) and indirect costs (rent, utilities, and insurance) needed to make the wine.

Specific item costing may make more sense for your winery, especially if the costs of your bottles of wine continues to increase dramatically. Also, many wineries like specific item costing, as it allows them to figure out how much to price their wine for on the market.

 

Protea Financial SKU Management

Which Costing Method Would Work For Me?

Before you decide which kind of costing method works well for your winery, there are a few factors you need to consider. You will want to choose the best costing method possible for you and your business. If you have friends, family members, or business acquaintances in the wine industry, you may want to talk to them about which costing method they prefer.

First, consider the size of your winery. For this example, we’re only going to focus on one critical aspect, SKU management.

 

  • How many different SKUs do you have?
  • How many different components are tethered to each individual SKU?
  • Which of these components are used for multiple SKUs?
  • How are you currently tracking each of your SKUs?

 

When you look at the potential avalanche of information from this one component of your business, it’s clear why there are several different costing methods. One costing method may work better than another for your business. A larger winery may want to use standard costing, while a smaller winery may want to use job costing. Again, there are advantages and disadvantages for each method you use when considering the size of production.

Second, you need to consider the price of your wines. Brand recognition plays a critical factor in your pricing model. For example, if your brand is synonymous with the quality standards of high society, your pricing model will be much higher than a smaller, lesser-known brand.

You also need to think about the demand for your wines. For example, if you are currently struggling to keep up with the demand for your wine, it is likely time to consider increasing the cost per bottle. If you’re on the other side of the spectrum and have more bottles of wine sitting in storage verse on the shelves and in people’s glasses, it may be time to consider reducing the costs of your wines to find a better balance.

 

Turn To Protea Financial for Bookkeeping Help Today!

Protea Financial can help you with bookkeeping, accounting, financial management, and inventory issues. We specialize in wineries, and we know we can help you grow your business. Find out how we can help. Contact Protea Financial today!

Protea Financial Is Here to Help!

Cost methods for wineries is more complicated than most other businesses. For help keeping the documentation straight, give us a call here at Protea Financial!

Difficulties of Cash Management for Wineries

Difficulties of Cash Management for Wineries

Small businesses often have cash management issues. In fact, over 60% of small business owners have cash flow problems from time to time. Over 40% of businesses have had cash problems so severe that they missed vendor payments, payroll, or leases. Controlling your cash flow is vital to the success of any business.

The wine making business, in particular, is a difficult one to manage cash flow for because of the nature of wineries. Here are some reasons wineries present a particular problem with regard to cash flow management, and here are some tips for keeping your wine producing in the cash-positive column.

Cash management is difficult for any business, but it is especially difficult for wineries because of the nature of the business. Here are some reasons why it is so difficult and also some tips for keeping your winery cash-positive.

 

Why Wineries Are A Special Challenge for Cash Management

Wineries are a special problem with regard to cash management for several reasons. First, wineries can be considered an agricultural crop if you have vineyards. Agricultural crops present a problem regarding cash flow because there are many costs that are difficult to predict. For example, you have a bumper crop of grapes growing this year. While you’re thrilled at the predicted crop yield, you realize you may need to hire more labor to get all of the grapes harvested. Contract labor is usually cash labor, which means your cash reserves are going to dip. Because wineries with vineyards are both an agricultural crop and a beverage, cash flow can be challenging.

Another reason cash management is a problem for wineries is because of the growing season. In general, from the time you begin with grapeseed until the time you harvest the grapes is approximately four years. Most agricultural crops begin and end within a calendar year. Because grapes for wine making have such a long growing season, unexpected expenses can crop up more than once. It can be difficult to control cash flow for wineries because there are both short-term (such as extra organic pest control) and long-term (such as an increase in barrel prices) costs.

Protea Financial Winery Cash Management

Why Is It So Hard to Manage Cash Flow in the Winery Business?

Wineries can find it hard to manage cash flow no matter how successful their wineries are. Here are some of the top reasons managing cash flow is more difficult at a winery than any other business.

First, wineries are both short-term and long-term businesses. In the short term, you have bottled wines for sale to customers. However, you also have wine aging in barrels and bottles that still count as inventory but are not for sale at the moment. The wine business isn’t like a convenience store, where the store owner buys products and then sells them to customers with a very quick turnaround time. Managing cash flow is difficult when you don’t have an end date in view.

Another reason wineries present a special problem regarding cash slow is a common one among all small business owners. Many small business owners, regardless of business type, don’t plan for emergencies. Even though cash management brings to mind stacks of cash in a safe, the term cash management refers to cash on hand, either in your business or in the bank. You will want to have an emergency fund at the bank for those business emergencies that always seem to happen at the least convenient time. For example, one of your employees accidentally drives a forklift over another employee’s foot. Do you have the money for a workmen’s compensation claim and the medical bills? It’s important to think ahead and plan a fund for life’s accidents.

When you own a small business such as a winery, you may have started with one employee at your backyard vineyard–yourself. Over time, however, your business has grown into a thriving enterprise with dozens of employees. You may still be thinking like a sole proprietor in terms of managing your accounts payable (expenses) and receivable (your income). If these aren’t regulated, it can lead to an overextension of your cash.

One of the largest reasons wineries have had difficulty with cash management is because of the stressors caused by the Covid-19 pandemic. The logistics for nearly all businesses have become difficult to predict. Delivery times for wine barrels, bottles and labels have been repeatedly pushed back. The cost of your raw materials themselves, such as cork, have increased as well due to higher transportation and delivery costs. Because wine production is such a specialized process, the number of vendors for corks and wine barrels are small, and the demands are sometimes large.

 

How to Manage Your Cash Flow Better

While it can be stressful to try and manage your cash flow for your winery, there are some steps you can take to improve your cash management.

First, it’s time to start making better budgets. If you are doing your own budget for your business, you need to begin to make expense categories for your winery. Although there are typical expense categories for businesses, you can make your own categories as well. You may want to have one column just for the costs of bottles and corks, for example.

Second, it’s time to watch your capital expenditures. Vineyards have a ton of capital expenditures at startup. You need equipment to farm grapes, and you may have purchased acreage for your grapevines. All of these capital expenditures come with financing, which means monthly payments. If you overspend on large capital expenditures, it may be difficult for you to manage your monthly cash flow.

You can also do weekly check-ins on your cash flow. Make a time each week to go over your books and look at your cash position. That way, if you have a massive increase or a massive decrease in your cash position, you can prepare for it, so there aren’t as many surprises.

Speaking of cash flow position, every small business needs an emergency fund. If you are nervous about keeping an emergency fund because you are on a tight budget, think about putting ½ % of your net profit toward an emergency fund. That way, no matter what emergencies come your way, you’ll be ready.

One of the best ways to manage your cash flow is to make sure you are collecting payments from customers in a timely manner. It can be particularly hard for wineries to apply revenue because they may sell wine by the bottle as well as the case. Usually, bottle sales are retail sales to individual customers, while case sales are to other businesses, such as restaurants and bars. In addition, you may sell barrels of wine to specific customers as well, so inventory management is just as important as cash flow management.

If you have an accounts receivable team, make sure they stay on top of incoming invoice payments. If you have been handling your receivables by yourself, it may be time to call in some help, even if you only pay them on a part-time or contract basis. By ensuring your receivables are coming in promptly, you will have incoming cash on a regular basis.

Protea Financial Cash Management for Wineries

Protea Financial Is Here to Make Cash Management Easier for Your Winery

There is an old saying about wine that states, “Beer is made by men, wine is made by God.” Any vineyard or winery owner would agree with that statement that it takes a special person to make wine. We would argue that it also takes a special person to handle all of the headaches that come with cultivating and producing wine.

As with many aspects of winemaking, nothing is ever simple or straightforward. However, if you remember these tips as a winemaker in the wine business, you’ll be able to get a handle on your cash flow management issues.

  • Try to enter all of your business expenses as quickly after a purchase as possible. This will help you keep your cash flow current.
  • You may want to categorize common expenditures in one general category. For example, all of your utility expenses could be categorized under overhead.
  • Pay your bills on time. Not only will that help your business credit rating, but it will also keep you in good standing with your vendors. You need your vendors to supply your business, so keeping them happy is helpful.
  • Seek out new ways to bring in additional revenue. What if you had tasting events at the winery, for example, with specific themes to add to the fun of wine tasting? The more customers you bring in, the more wine you’ll sell.
  • Make handling your cash flow a top priority or a business goal. If you focus on cash flow, your management of business expenses should become less of an issue.

Feeling a bit overwhelmed by your cash management issues? Need help with managing your finances for your winery? You should contact Protea Financial. We have been working with vineyards and wineries for nearly two decades. In fact, wine bookkeeping, accounting, and inventory management are our specialties. We can even provide contract high-level financing help, such as a constructive cash flow analysis. Why not contact Protea Financial today, and let us help you grow your wine business?

Protea Financial Is Here to Help with Cash Management

Cash management for wineries is more complicated than most other businesses. For help keeping the documentation straight, give us a call here at Protea Financial!

Protea Conversations: Karen Alary

Protea Conversations: Karen Alary

Protea Financial was founded in 2014 to provide high-quality outsourced accounting at an affordable price.  Given Protea’s flexible work environment, the Company especially appealed to accountants who wanted to re-enter the workforce after taking time off to start a family. This allowed Protea to attract extremely talented individuals who were previously overlooked.  Protea strives to represent people from all backgrounds and provide an environment for them to grow and succeed in a setting that provides the flexibility and acceptance of who they are as people.

We selected the name Protea because is the national flower of South Africa and is a symbol of our connection. The Protea flower has become an ornamental flower because of this striking beauty and is included in arrangements and bouquets as a symbol of courage or daring to be better or a sign of positive transformation.

Protea Conversations in 2022 will focus on positive transformation and representation from all backgrounds. We are broadening our Conversations with the hope that these conversations will continue to create a forum to discuss the experiences, opportunities, and challenges leaders face, and how we can build a more diverse, inclusive, and successful environment for everyone.

In July, we talk to Karen Alary of the Personnel Perspective. Founded in 1987, The Personnel Perspective has an outstanding reputation for quality service in human resources consulting, leadership training and development, recruitment, organizational design, conflict resolution and mediation. The firm works with companies of all sizes in all industries and provides customized solutions based on the client’s individual needs and circumstances.

After completing college, Karen Alary began a career in human resources.  Her experience, not the typical career progression you might expect, was well-rounded and prepared her to eventually become owner and Managing Partner of The Personnel Perspective.  The Personnel Perspective was founded and is still based in Santa Rosa and Napa, and is currently celebrating its 35th year in business.

Karen grew up in Sonoma County and has deep ties to the community.  One of her personal values is to give back to her community through volunteer work and supporting some local non-profits.  She believes that through the work The Personnel Perspective does and the time she gives to non-profits, she is helping make businesses stronger, leading to a stronger community.

Tell us about your decision to start a career in human resources and your journey to Managing Partner of The Personnel Perspective?

The HR profession found me.

The confluence of two important factors brought me to the HR profession and, later, as the Managing Partner of The Personnel Perspective. 

My degree is in business management.  Out of college, I worked in a national labor and employment law firm.  I was fascinated with the myriad issues businesses faced with their employees, the counsel attorneys gave to business owners and leaders, and the resolutions reached.  I was clear I did not want to be a lawyer and so I gravitated toward the HR profession.

Years into my HR career I had the opportunity to do some consulting work.  This work expanded and I realized there was a lot of need in our business community.  The thought of helping many businesses was very appealing to me and as I continued consulting I had the opportunity to buy The Personnel Perspective, a well-established HR consulting firm based in Santa Rosa.  This was a huge attraction because I loved the work I was doing and the idea of becoming a small business owner was kind of full-circle for me as I had grown up in an entrepreneurial environment.  My father was a successful business owner and I witnessed the rewards and challenges he faced. 

Protea Financial Personnel HR

What has been the biggest challenge you have experienced in reaching your current success (personally and professionally)?

As a small business, we face many of the same challenges as our clients in trying to keep up with all of the state’s employment and business regulations.  California regulations are challenging for all small and medium sized businesses and the cost of business and living are so high in this state that the balancing act we all have to perform to continue has to be part of the overall strategy.  As HR professionals, the biggest challenge in the current environment is being pulled in so many different directions given that there continue to be pandemic protocols to account for, we have to be on top of all the potential legislative changes being considered and be ready to help clients continue to be compliant and we need to manage our own internal infrastructure so that we can be efficient and responsive.  The HR profession in itself is a balancing act with many competing priorities and that is what keeps the work interesting and worthwhile. Our main function is to be problem solvers and with the competing needs of small businesses, it can be a perfect storm; sometimes there aren’t perfect solutions and we have to exercise creative thinking and be flexible.

What are your short-term goals of your career and yourself?

In the short-term, my goals are to provide value and excellent service to our clients.  We focus on building long-term relationships and take the time to get to know our clients, their needs, their industry and organization, and prioritize the strategic partnership. 

In the long-run, I would like to become an advocate and voice for small businesses in California at the state level.  According to a report published by the California Governor’s office, California small businesses create two-thirds of all new jobs and employ nearly half of all private sector employees; they are the drivers of economic growth and we must ensure they remain strong and relevant. Legislators can often be a bit out of touch when they write bills that affect businesses in that they may not have awareness of the challenges businesses face in having to follow the new or amended regulations.  They are policy makers and not in tune with the cost to implement and the day-to-day or practical issues that arise during implementation.  While policy and legislation is important to protect employee rights, a balance must be struck between worker protections and for keeping the legal and regulatory quagmire from becoming so cumbersome that businesses can no longer stay afloat particularly given that entrepreneurs play such a vital role in California’s economy and job market.

What is the best piece of advice you have ever received that has helped you in your success?

A colleague shared the analogy of HR being like a bicycle wheel.  HR is the hub of the wheel with all the spokes coming off of it to make the larger wheel itself.  All the spokes are the various stakeholders and priorities for a business.  HR’s job is to keep everything balanced so the wheel doesn’t become warped.  A warped wheel is hard to peddle on and can cause the bicycle to become unusable.  We want to have balance and fairness, appropriate legal compliance, awareness of risk, solve the problems and keep employee satisfaction high, all while ensuring the business remains strong and can continue to meet its mission and goals. Every aspect, each of the spokes, matter to the wellbeing of the organization—the wheels ability to balance and function.

What is the piece of advice that you wished you had gotten when you were starting out?

Every HR professional struggles with confidence at the beginning because there is so much technical information we have to store in our knowledge banks.  When starting out we all can be hesitant when we don’t have enough experience and exposure yet.  Nonetheless, giving HR practitioners time for the steep learning curve and allowing space to take risks is the best way to learn and grow confidence and professional experience and knowledge.  HR as a profession can lend itself to individual practitioners becoming too risk averse in general because we are always thinking about the risk and potential exposure to lawsuits or other expensive employment claims for the business.  Even with the legal environment as it is today, in order to be innovative, we have to be willing to try new things while thinking through our decisions and the possible consequences.

Protea Financial Protea Conversation with Karen Alary

What advice would you give to others to help them be better leaders?

Leadership is all about building strong, authentic relationships, developing strong listening skills and emotional intelligence, determining what the tone and example is that you want the organization to follow, and being real and consistent.  Trust is the foundation of leadership and it takes humility, reliability, caring, good boundaries, and a structure and value system that establishes the type of culture that will result in retention and performance.

Can you share something interesting about yourself that will provide insight into who you are outside of the professional space?

This is a tough one because my professional self and personal self overlap.  I think one part of me that is not visible though is my spiritual mindset, which, by nature, is a path for continual growth.  Rather than having a limited, negative thought perspective that leads to a belief that we live in a world of lack and scarcity, I believe in operating from an abundance mindset which allows me to shake off the disappointments and keep going.  

*****

As a thank you to our interview and Protea’s commitment to more diverse and inclusive leaders, Protea will donate to Positive Images (https://www.posimages.org/). Positive Images is a grassroots nonprofit organization serving Sonoma County since 1990. Their LGBTQIA+ Community Center hosts multiple weekly support groups, a youth leadership development program, mentorship opportunities, an LGBTQIA+ Library, resource and referral station, and a Transformation Station. They proudly offer a warm, welcoming, and affirming environment for young people to explore their individual identities, develop leadership skills, and contribute to our collective community. Positive Images staff lead LGBTQIA+ Cultural Competency Trainings and presentations that educate the greater community focusing on human connection, compassion, and inclusion. Their goal is a community where all LGBTQIA+ people are valued, compassionate community members, creating a just society.

Protea Conversations Let You Expand Your Network

Grow your network by connecting with the amazing companies we speak with in our Protea Conversations. If you need help finding the right fit, contact us here! We will do our best to help. 

What Is COGS? And, Why Should I Care? An Introduction to Costing

What Is COGS? And, Why Should I Care? An Introduction to Costing

Small business owners who look at balance sheets regularly are in the minority because there are many other demands on their time. Understandably, business owners would want to worry about staffing, marketing, and customer service before thinking about those columns of figures. However, business owners who wish to grow their business moving forward read and understand the numbers for the COGS. Do you know what COGS stands for and why understanding COGS is so important for the health of your business? Keep reading to get information to help keep your business moving.

 

What Is COGS?

The term COGS stands for Cost of Goods Sold. Your “goods” may be either goods or services you provide to your clients. You may have seen COGS as COS (Cost of Supplies or Cost of Services) as well. No matter which acronym you use, the figures for COGS are essential because they sum up how much it costs your company directly to produce your product or service.

The COGS numbers are a review of expenses for your company. Usually, the numbers are calculated for the same month you calculate your revenues. COGS numbers don’t include the costs of selling your product or administrative expenses. General business expenses (such as pencils) are usually not covered by the COGS numbers. Instead, you can find those numbers by the acronym SGA (Sales, General, and Administrative)  or SG&A (Sales, General & Administrative on your balance sheet or on a profit and loss statement.

 

Why is COGS Important?

The numbers around the COGS are vital for your business. Because there are several numbers involved, let’s look at all the information in the COGS figures and why you need to look at the numbers closely.

Protea Financial 7.14.22B COGS

Direct Materials

Direct materials represent how much you had to pay to make your product. Direct materials are consumable pieces that go into making a product to sell. People call direct materials raw materials because you must have these materials to make your product. For example, if you make chocolates to sell, one of your direct materials costs would be the cocoa powder you bought for your chocolate. Unlike most other cost numbers, the direct materials fluctuate up and down because the market drives it. The direct materials costs will be lower during some months than in previous months.

For example, gas prices at the beginning of the pandemic were less than $1.50 per gallon because no one was driving their personal vehicles. However, gas prices have skyrocketed with more people driving, the war in Ukraine, and the lack of supply to meet the oil demand. Because the gasoline prices have been so volatile, people who use gas as part of their business, such as landscapers, have seen their direct costs increase substantially over the last two years. Also, because transportation goods for all manufacturers have increased, you may notice you are paying more for raw materials than ever before because your suppliers are passing their increased expenses to you.

 

Direct Labor

Direct labor numbers show how much you had to pay employees who produce your product or service. If you owned a chocolate factory, direct labor costs would be for anyone employed to produce your chocolate. Direct labor costs can include full-time and part-time employees, as well as temporary employees, if you hired them during a surge in production. If you had employees who worked overtime in your product’s production, those numbers also need to be reported here. Remember that labor costs for sales and administrative people are not reported here.

There’s more to the direct labor cost than just salary or wages; all the payroll taxes for your employees also belong in the direct labor cost. You can also include figures for unemployment insurance, Social Security, and Medicare costs here.

If your company pays incentives or bonuses for great work or employee retention, you should be able to list those under direct labor costs as well. If you give your employees gift cards as an incentive, you cannot list that here since it isn’t money you paid out as wages.

 

Supplies

Not every business counts supply numbers in the COGS. However, if you have to use supplies to manufacture your product to sell, such as wrappers or packaging, you could put those figures in the supplies column.

There are several items you could list in your supplies figures, but they are usually broken down into two categories. First, there are your factory supplies. These are supplies that are needed in your manufacturing processes, such as those wrappers and packaging. Also, soap, cleaners, and janitorial supplies can be listed here as well. You may also have items such as hangers, silica, and other supplies used to prepare the product for shipping, such as boxes and labels.

 

What Is the COGS Used For?

Business owners need to be familiar with the COGS because they directly affect their businesses. First, the COGS is used as a marker for figuring out your business net income. Your net income is vital come tax time. If you want to use the COGS to make deductions on your business taxes and reduce your tax liability, you need to keep meticulous records of your monthly costs.

Second, businesses can use the COGS as another lens to look at their business’ overall health. If your business is spending less money to make the items you sell than it is taking in during sales, your gross profit margin will be higher, which signals that your business is healthy. Suppose your business is spending more money to sell the product than you are taking in for sales, especially over a long period. In that case, you may need to reduce your expenses to continue having a healthy business. Your gross profit margin is like a traffic signal for the health of your business.

Third, the COGS represents a line item on your profit and loss statement. Still, many potential sources of additional financing look at the COGS to decide whether or not to invest capital into your business. If you want to expand your business, for example, a lender is going to look at your COGS to see if you have healthy sales numbers to justify expansion.

Your COGS may also show deficits in your overall marketing and sales plan. For example, if the cost of your materials hasn’t risen substantially, and sales of your products remain fairly constant, but your business isn’t increasing its sales the way you would like, it may be time to look at your spending in sales to make sure you are getting your money’s worth from your sales department.

 

What Isn’t In The COGS

Your overhead is perhaps the largest expense that isn’t included in your COGS. Overhead costs are defined as those costs a business incurs each month whether they sell any of their product or service or not. Overhead costs would include the amount of rent or mortgage you pay on your office space, factory, or storefront. Utilities would be included in overhead costs as well.

Overhead costs include insurance for the building and contents because most small business owners need business insurance to do business. Many businesses also list office supplies not related to manufacturing here, and business owners also list large office costs here, such as computers, office phones, and office furniture. You might also list maintenance fees for the building and grounds here as well.

Protea Financial 7.14.22B Winery COGS

Why Should I Care About COGS?

It can be difficult as a business owner to interpret all of the figures swirling around your business. The larger your business grows, the more difficult it can be to take time to look at your business figures, especially in this economy. So many businesses are trying to reconfigure the cost of doing business in the pandemic era that it can be hard to look at numbers at the end of the day.

However, because your COGS directly relate to the health of your business, you need to create time to digest those numbers on your balance sheet. COGS can affect your cost of doing business for months and years into the future since the numbers are used as a business health checklist for lenders and insurance companies.

 

Turn to Protea Financial for Help Understanding COGS and How It Applies to You

If you don’t know how to read your business financials, including COGS, there are ways you can get proficient at it. You can begin by studying those financial terms online to get an introduction to financials. However, there are companies that help business owners make sense of all of those numbers. Protea Financial has been working with small business owners for nearly two decades. We can help you with bookkeeping, accounting, and inventory management. If you need help making sense of your business numbers, we can help. Contact Protea Financial today, and let us help you move your business forward today.

Protea Financial Can Make Understanding Your COGS Much Easier

Understanding your Cost of Goods Sold, or COGS, is important. It is vital to keeping your business healthy! Contact us here at Protea Financial for help understanding it all!

A High-Level Look at Bookkeeping Tasks

A High-Level Look at Bookkeeping Tasks

If you are tired of looking at that giant pile of receipts on your desk that doesn’t seem to ever get any smaller, there’s something you can do about it right now. You can begin looking for a bookkeeper to hire. If you are a business owner who is considering hiring a bookkeeper, you may be wondering what they actually do that would help your business. Bookkeeping isn’t just hiring someone to keep track of all of those receipts. Bookkeeping involves many higher-level financial skills that you may not even be aware of. Hiring a bookkeeper may really help your business grow and prosper. Here’s a breakdown of all the high-level things that a bookkeeper does.

 

Keep Financial Records

One of the most important things a bookkeeper does is to keep your financial records. Many business owners assume that all bookkeepers do is to organize financial records. However, bookkeepers actually do much more than that. Bookkeepers keep track of all of your incoming income and outgoing expenses, which makes everything in your business run more smoothly. Bookkeepers can create, organize and maintain all of your financial records. Your records will move from a system of haphazard folders and stacks to computerized, systematic, accurate records.

Not only will your bookkeeper keep all of your financial records organized and accessible, but they can produce easy to read reports. These reports can help give you a snapshot of the health of your business each day, week, or month. Bookkeepers can even produce year-end reports so you can picture where your business was successful in the last year, and where it may need some work. This information can help you make better decisions for your business in the long run.

Protea Financial Financial Records

Manage Accounts

Many business advisors suggest that the average small business have at least three accounts. You should have one checking account for your accounts payable, one savings account for your accounts receivable, and a high yield savings account for long-term business savings. If you have a business loan from a broker or a federal loan from the Small Business Administration, you may have a separate account. Businesses who open more than one location tend to have a checking account for each of their location. All of these accounts can add up to a headache for you as you try and balance them all.

Bookkeepers also can manage all of your business accounts. If you operate as a sole proprietorship, you may only have one account, but the larger the business is, the more financial accounts you may have. It can be difficult to keep all of your accounts straight, but with a bookkeeper, you don’t have to. In fact, no matter how many bank accounts you have, your bookkeeper can manage them, and give you reports on the state of your accounts. When you have someone else managing your financial accounts, you will be able to move money between accounts quickly and keep all of them prepared for your next round of transactions.

Also, because bookkeepers work constantly in the financial sector, they may be able to save you money on all of your banking and account transactions. For example, your bookkeeper may determine that changing financial institutions will save you hundreds of dollars a month—money you could put back into your business.

 

Handle AR/AP

One of the most important roles your bookkeeper can help you with is your accounts payable and receivable. When businesses talk about accounts receivable (AR), they are speaking about money the business takes in, through invoices, bills of sale and statements. An accounts receivable balance sheet lists all money owed to a business that hasn’t been paid yet.

In contrast, accounts payable (AP) represents short-term debts that a company owes. These debts might be to vendors you buy products from, or vendors that provide services for your company. Utilities can also be considered accounts payable. You can also add other short-term debts to the accounts payable list, including pest control, wholesale business orders of supplies and even short-term loan payments.

Accounts receivable and payables are a large part of business recordkeeping. With a bookkeeper keeping your incoming and outgoing paperwork, your accounts receivable and payable will be better organized. Most large businesses keep double ledger entries, and your bookkeeper can get a ledger entry system started for you so that you can have as accurate a snapshot of your business as possible.

 

Guide Financial Decisions

When you first started your business, you most likely guided yourself, and you made decisions based on prior business knowledge you honed over the years. However, as your business grows, you not only have to manage larger financial transactions with a larger customer base and far less time. It’s time to find a guide who can focus on finances and let you focus on other aspects of your business. With all of the information a bookkeeper can offer you, your financial decisions will be easier to make. You’ll be able to base your decisions on solid financial backing. A bookkeeper’s information may also be able to help you secure additional funding, or make decisions about hiring additional employees.

Also, you may not understand the financial standards that lending institutions, creditors, financers, and even potential investors will look for when you want to move your business forward. In fact, there’s a set of standards called the General Accepted Accounting Principles (GAAP) that most businesses use to set up finances. Your bookkeeper and your accountant will use these same principles, and it will make continuing to improve your business’ financial position far simpler.

Protea Financial Wine Inventory Management

Inventory Management

No matter what kind of business you have, you will have inventory. You may have a little inventory consisting of office and cleaning supplies. You might be part of a medical practice with a medical supply inventory. If you sell to businesses or individuals, your inventory may be extensive. Like nearly everything else with a business, your inventory continues to grow the larger your business grows. In fact, if you don’t take care of the inventory in your business, your lack of inventory control could spell failure. One of the top 10 reasons businesses fail is due to inventory mismanagement.

Bookkeepers can help you with inventory control. If inventory control is essential to your business growth, why not allow your bookkeeper time and money to manage it? Many bookkeepers have inventory expertise, and if you give someone else control ordering and cataloguing, you free up needed time. Inventory control helps you to manage your business more effectively, and even move towards more accurate ordering in the future. Inventory control can be a great way to save some money.

 

Payroll

If you began your business as a sole proprietorship, you most likely weren’t paying anyone including yourself. Now that your business is growing strong, you may be faced with employees who have moved from contract labor or part-time labor to full time with benefits. Payroll with fulltime benefits means you’re now keeping track of payroll taxes. These payroll taxes require you to make payments to the state and feds. You also have to contend with pension, retirement or social security benefits as well. With a bookkeeper, payroll becomes much easier for you to manage. Bookkeepers can prepare payroll and keep track of payroll reports. You can track all of your payments and decide which employees to give raises to. Wouldn’t it be nice to spend time giving benefits, raises, and employee profit-sharing, rather than wasting time with payroll spreadsheets?

 

 

Turn to Protea Financial to Get Help with Your Bookkeeping Tasks

While many business owners see bookkeepers as simply spreadsheet keepers, bookkeepers are able to perform high-level accounting and inventory functions. Hiring a bookkeeper will cost you money in the short term, but it may be one of the best business decisions you ever make. Bookkeepers can work to streamline your financial process, and allow you to focus on financing, hiring the right employees, keeping your customers happy and attracting new business through marketing and customer outreach. If you need help finding the perfect bookkeeper for your business, we can help. We have specialized bookkeepers and accountants who can become valuable business allies. Contact Protea Financial today, and let us help you connect with a wonderful bookkeeper.

Protea Financial Can Help You with Your Bookkeeping Tasks

Contact Protea Financial now for help with any of your daily, weekly, monthly, or yearly bookkeeping tasks!