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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 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!

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!

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!