While extremely rewarding, getting a winery up and running can be very difficult to do. Not only does it require a large amount of capital and resources to start with, but you also won’t even start selling wine until a few years down the line. It’s a large investment with a substantial amount of risk – especially if you don’t plan accordingly.
In this article, we’ll discuss how you can use financial forecasting and cash flow planning to ensure that your winery is set up for success.
What Is Financial Forecasting?
Financial forecasting is the process of estimating your expected financial status in future periods. Usually, forecasting involves making use of existing data and is most commonly seen in income statements. However, more complete financial models will have forecasts for all of their financial statements, including the balance sheet, cash flow, and statement of owner’s equity.
Financial forecasting models vary from business to business. Some companies use historic figures and data as a basis for future trends, which are easier to calculate but not as reliable. Other companies favor studying expansion and inflation rates and other forecasted data, which can be more time-consuming but possibly more accurate.
Here are some of the most commonly used methods of financial forecasting to give you a better idea of how they work:
Arguably the easiest financial forecasting method, the straight-line method uses linear growth as basis for computation. If you were to chart the growth on a graph, you would notice a straight line moving up or down, hence the term “straight-line.”
To calculate using the straight-line method, all you need to do is calculate the growth rate of any relevant data you wish to forecast, such as sales. Then, multiply the current data by the growth rate to get the future amount. This process can be repeated indefinitely.
The main downside to the straight-line method is that it’s not a very accurate one, especially for smaller, more volatile businesses.
Linear regression is a popular method of financial forecasting that makes use of trends and extrapolating forecasted data from them. Similar to the straight-line method, linear regression does involve lines, but instead of the values forming the line, the values are fitted into a linear equation.
Because of its accuracy, linear regression and its various sub-methods have become one of the most common ways to forecast financial data. Unless you have the knowledge and expertise, however, you may want to refer to professionals for an accurate analysis.
What Do I Do with Data from Financial Forecasting?
Once you have a predictive model of your financial data, you can then begin to make decisions to maximize gains or minimize losses. If you’re expecting more sales in the future, you can increase production now to gain even more profits. If sales are forecasted to go down next year, you may want to cut your losses by lowering your prices. The data itself won’t save your businesses – only you can.
What Is Cash Flow Planning?
Cash flow planning is a subcategory of financial forecasting. Instead of predicting all of your financial data, however, it focuses on the future inflows and outflows of cash in your business.
Cash flow planning is such an important tool because cash is the most liquid asset that drives nearly all transactions. A business that runs out of cash dies.
To make an accurate cash flow plan, you need to consider multiple factors. Here are some of the most important ones:
This is by far the most important (and most predictable) outflow of cash. Every day, week, month, quarter, or year, you have recurring expenses that the business must pay to keep running. Common examples of this are payroll, rent, and utility bills.
Not everything goes perfectly in business. Sometimes, your business may incur losses that aren’t part of your regular expenses. These losses aren’t very predictable and can leave you with little to no liquidity.
Examples of losses include accidents (such as car accidents), natural disasters, and even spoilage. Since you can’t really predict when these events will occur during the year, some businesses set aside an amount that’s reserved for losses.
The market’s always changing, and so do the prices of goods. For wineries, this can be the difference between a large profit margin and barely breaking even. By understanding and taking into account the price changes of materials, ingredients, and even equipment, you’re able to more accurately determine your expenses and earnings for the period.
How Often Should I Make Cash Flow Plans?
Since cash flow plans involve your most liquid asset, they are best made on a month-to-month basis or even more frequently. A lot of businesses would benefit at looking at their expected cash position before making weekly payments so they can consider if delaying of payments are necessary or if they need to talk to investors or lenders to extend funds to get through high cash flow period (think about all the additional needs for cash during harvest).
Making cash flow plans for the next year is difficult, and often changing but most businesses need to plan more than a few months out, especially manufacturers, which would include wineries. At a minimum a business should be forecasting 3 months out but forecasting 1 year out will be very important to allow to make better decisions.
After making a cash flow plan, you should now have a good idea of what to expect for the next few months, and whether or not you’re going to have sufficient funds to cover your current needs.
Financial forecasting and cash flow planning are useful tools to help you make financial decisions to maximize your profits and ensure your business never runs out of cash. Financial forecasting can give you an idea of the general direction your business is headed, whereas cash flow plans help you stay on top of your month-to-month operational expenses and assisting in making long term financing decisions..
By understanding how financial forecasting and cash flow planning works, you can guarantee the success of your winery for years to come.