by Zane Stevens | Jul 28, 2020 | Accounting, Financial Services, Wine Industry |
It is common for small wineries to avoid raising their prices for an extended period of time. This is due to a variety of factors, including a lack of accounting input regarding price-volume trade-offs and management’s desire to preserve customer interest. Alternately, a winery may opt to make price changes based on a gut feeling. Neither of these strategies will help you maximize your profit margins and grow your business.
The Financial Impact of Price Changes
Perhaps the winery simply neglected to make price changes. That is still a decision that will impact the winery but produces exclusively negative results. When wineries choose to delay price changes, the cost of production steadily eats away at profit margins. This reduction in profit margins may go partly unnoticed or unattributed and encourage wineries to make ineffective price changes. Wineries should adjust their prices with relative frequency to match the rise of inventory costings and the value of labor. Planning for price changes is a key step for proprietors to undertake.
However, important decisions regarding price adjustments do not need to be made by a single person or section of the winery – rather, it should be a deliberate choice based on data from multiple individuals or teams. By facilitating a conversation between sales, winemaking, and accounting, a winery can make informed decisions.
Establishing a Team of Expert Staff
Each section of the winery provides valuable information. Effective accountants will be tasked with determining the true profit margins for each wine. While it may seem simpler to apply a blanket price increase, this ignores individual inventory costings. A generalized decision can negatively impact your price-volume trade-offs and result in lost profit. It’s invaluable for wineries to track data on individual SKUs throughout the year.
Each wine will have a set of associated costs: fruit costs, barrel costs, winemaking costs, and packaging costs. By keeping track of these SKU-specific profit margins, it will be easier to adjust the price for individual products.
The sales team can compile market data to estimate the price elasticity of demand. This can help guide the price change by demonstrating how much a 2-5% increase will impact the volume of sales. This insight on price-volume trade-offs is an invaluable factor for providing an estimate for a price increase range and its effect on the business’s profitability. This market data is also crucial for pricing individual wines to maximize profit. Your most valuable wine can generate a higher ratio of profit when marketed and priced appropriately.
How to Determine the Right Price Change for Your Winery
It is important for wineries to avoid making gut-feeling decisions. At best, these choices will be ineffective – at worst, they will negatively impact your profit margins and customer trust. Wineries should rely on a dedicated team to keep an eye on trends, track inventory costings, and reevaluate costs versus prices.
For the most part, wineries should plan to increase prices for their products. Production costs and the value of labor is steadily rising, and that cost should be reflected in the price to maintain a 45% or better gross profit margin. There are rare cases where a winery will elect to decrease price and increase the volume of a particular wine to reap more profit over time.
However, due to the extensive timeline needed for winemaking, it is difficult to increase product circulation quickly enough to improve profit margins. Wineries may choose to invest in additional labor and inventory to bottle more wine. Yet months will pass before a winery can sell their product to consumers. This lag between investment in the product and reaping profits (and the associated time value of money) can compound the difficulties and further reduce the return on capital caused by low profit margins.
Another possibility exists for wineries to improve their profit margins by decreasing the price of their wines. However, this is a rare situation. This is most common in wineries that already have high-profit margins, and even then, it is rare. As with all pricing decisions, choose to approach price decreases with carefully collected analytical data.
Instead, wineries will almost always increase the price (instead of the volume) to reflect the value of the product. It is likely that a winery may delay price increases due to fear of customer reaction. This is one reason why it is necessary to rely on data from the sales team. By allowing sales to collect and report data regarding market elasticity, management can make guided price adjustments and have a realistic estimation of the impact on consumers.
Employing Phase Planning
If a winery has delayed increasing prices for an extended period of time, it may be necessary to institute phase planning. Planning phases of price increases can preserve the overall price elasticity in your market, therefore encouraging consumer retention. Choosing to increase prices gradually will also allow for the sales and marketing team to evaluate the effect of each phase. This data can be used to adjust future phases as a winery restores its profit margins.
Price changes can and should be communicated to customers. This is especially true for phased planning, as the buyer will see multiple raises in price. The communication can be effectively handled by management and sales. Providing a brief snapshot of the accounting data is usually deemed unnecessary. Instead, communicate with consumers in generalities while maintaining transparency. By setting expectations, customers will be more receptive to price increases. Effective marketing has the potential to reduce price elasticity.
Though it is possible to manage larger price increases or phrased price changes, it is ideal to make more frequent changes. Reviewing costing and pricing quarterly encourages wineries to track and record data throughout the year. Insightful inventory costing is often left until the end of the year. However, this decision can harm wineries. Accountants may neglect collecting important information under the pressure of a deadline. This can easily impact a winery, as it loses the potential to prioritize marketing its most valuable wines.
Price Changes Keep Your Winery Thriving
In order to maintain profit margins and preserve positive consumer opinion, plan for price changes. Even if you do not increase your prices quarterly, it’s crucial to collect and analyze pricing and costing data on an ongoing basis. If you haven’t done so already, construct a dedicated team to address pricing. Opening this line of communication and trusting in the expertise of sales, winemaking, and accounting is the key to maintain and improving gross profits.
by Zane Stevens | Jun 22, 2020 | Accounting, Bookkeeping |
As wineries search for growth in today’s digital world, the accountant vs bookkeeper debate has become all the more relevant. Innovation, technology, and eCommerce have made traditional marketing strategies for wineries nearly obsolete.
As RaboBank recently highlighted, only those wineries who respond to market changes with the needed urgency will thrive, and wine businesses that have leveraged the power of eCommerce have already seen massive returns. In this effort, the need for winery accounting and bookkeeping management has also risen.
Accountant vs Bookkeeper: Who Does What?
Before we get into which professional is right for your winery, it’s important to highlight the differences between them; each specializes in different responsibilities between financial and operational management within your winery business.
An accountant is responsible for recording and presenting the financial well-being of a business. The most pertinent profiles for Ecommerce wineries are management accountants and tax accountants.
Management accountants take charge of representing the financial performance of your digital business through drafting budgets, reconciling balance sheets, and analyzing financial reports stored on your eCommerce platform, among other actions.
On the other hand, a tax accountant does tax reporting management. That includes calculating your business taxes and offering counsel on your business strategy to minimize tax audits and lessen the possibilities of tax law breaches.
Unlike accountants, a bookkeeper records any and every financial transaction that your winery does. They are important team members, as they are responsible for identifying, recording, and labeling the purpose of every financial transaction in your winery.
Is an Accountant or a Bookkeeper Right for my Winery?
The Ecommerce winery business model calls for both management and tax accountants. Management accountants are important as they provide you with the financial insight you need to gauge the effectiveness of your business strategy and make better financial decisions. While some winery executives feel that they can handle finances on their own, doing so will take them away from other important areas of business development, like sales and digital marketing.
Similarly, tax accountants are all the more important now than ever as winery businesses now need to enter into unchartered waters of eCommerce. Onboarding an accounting professional who has the right legal and tax knowledge in the digital field will steer you away from possible tax infringement.
Bookkeepers take care of major responsibilities. However, practice shows that they are often too bogged down by data entry tasks that they don’t have the time to deal with possible financial issues, or provide actionable analysis and insight into the business’s key performance indicators (KPIs). While accountants can absorb the role of a bookkeeper, they tend to be overqualified and too expensive for the role. Furthermore, hiring all three professionals individually is too costly for most wineries, and the winery owner or executive is still responsible for making sure all three individuals work together seamlessly.
Luckily, the solution to this financial dilemma can be solved by getting in touch with Protea Financial.
Protea Financial: Ultimate Winery Accounting & Bookkeeping Services
Protea Financial is an accounting and bookkeeping firm that designs and implements customized accounting solutions for businesses. We are not a tax preparer, but we support businesses of all sizes in managing their finances so that they can focus on other facets of their business development.
Our services include tax schedules, managing financial accounts, preparing accounting documentation, and bookkeeping.
For wineries, we have an all-inclusive service that covers responsibilities needed for tax and financial management and bookkeeping, and our services are significantly less expensive than if a winery were to individually hire each professional.
By housing all professionals under one team, we deliver the same services at a rate that’s below the average marketing-price while maintaining premium quality and accuracy. Furthermore, the winery’s leadership does not need to spend time training, overseeing, and making sure unrelated financial professionals are working together productively.
Our team, led by Zane Stevens, consists of almost 25 accountants that, together, bring decades worth of accounting and financial managerial experience to our projects. We are poised to assist you in driving your winery business to success.
Get in touch with us to set up a consultation for your winery accounting and bookkeeping needs. We will conduct a thorough evaluation of your winery financial life-cycle to develop and propose a strategy that will lead you to financial freedom.
Set up your evaluation today.
by Zane Stevens | Feb 18, 2020 | Financial Services, Wine Industry |
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.
Ask Protea Financial how they can help with your inventory costings.
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.
Zane Stevens is the Director of Protea Financial. Protea provides services to take over the burdens and responsibilities of finding, managing, and training an accountant or bookkeeper for businesses and free up proprietors’ time, so they can focus on building their businesses.