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How to Calculate the Cost of Making Wine

How to Calculate the Cost of Making Wine

To run a profitable winery, it is vital to understand how much profit you are making per bottle of wine sold. You will need to be able to determine and understand what you can sell your wine for and how much that wine costs to produce.

While the market will dictate how much you charge for your wine, you control how much it costs to make it, as long as you understand what is included in the costs and have a mechanism to track it.

An accurate calculation of the costs to make your wine increases the likelihood of operating a profitable winery. Although this sounds like a simple endeavor, there are challenges. From determining which costs to include, to tracking all expenses through the production process, getting to a final dollar value takes time and careful consideration.

The Basic Terminology

Before we can start discussing how to value your winery inventory, let’s define two key accounting terms.

Cost of Goods Produced (COGP) 

Commonly known as wine in process or cost of inventory, all costs involved in the process of making wine are included. This includes things like:

Raw materials
• Services
• Labor
Overhead allocations

Whether direct or indirect, all costs from planting through to bottling the finished wine are included in COGP.

Cost of Goods Sold (COGS)

The COGS is the cost of the wine sold in a specific period. You’ll need to match the cost of the inventory you sold to your revenue. A simple way to put it, for each bottle of wine sold, how much did it cost to make and get it into the hands of the customer.

Now that you understand the two primary accounting terms related to production, we need to dig deeper into the different ways to develop a value for your COGP, starting with the groups of costs involved.

Inventory Costs

Winemaking generally involves three main types of costs.

Direct materials
Direct labor
• Overhead allocations

Direct Materials in Winemaking

Calculating materials cost is reasonably straightforward. It is the cost, including tax and delivery fees, to acquire your materials and get them to your production area. This includes raw materials like grapes and packaging materials like bottles and boxes.

Segregating these costs makes the allocation of overhead (which we’ll discuss a little later) a little easier and more accurate. And it makes sense for blended wines. You’ll be better able to track the component costs.

While you may initially record the cost of grapes separately (if you are farming, this will be more complex than if you are buying grapes), it will be added to the other expenses, such as fermentation and cellar costs, to get to your bulk wine cost.

Direct materials don’t include materials consumed in production. For example, light bulbs or air filters in your production facility are manufacturing overhead.

Labor in Winemaking

Labor required to turn your raw grapes into a finished bottle of wine should be included in inventory costs. You’ll want to include not only salary and wages but also benefits and payroll taxes.

Owner or executive compensation is difficult to classify. While they are involved in the winemaking process, they also work in other areas, like administration and finance. For these individuals, determine how much of their time is involved in the winemaking process and apply the percentage to their total payroll costs. Using reasonable estimates is acceptable.

Overhead in Winemaking

Costs incurred to keep your winery operating but aren’t direct materials or labor are overhead. Overhead costs are usually aggregated into cost pools and allocated based upon the number of bottles produced.

Examples of overhead include property insurance and taxes, building repairs and maintenance, utilities, and administrative staff wages.

With your bulk wine value, adding expenses for your direct labor and overhead gets you to the total cost of the finished, ready-to-sell wine.

After you’ve tabulated the total inventory costs, you’ll need to consider how your wine inventory moves. This cost-flow is your inventory valuation method and impacts your COGS, income taxes, and balance sheet ratios for lending requirements. Choose the other that best suits your production process.

COGP/Inventory Valuation Methods

Specific Identification

This method involves tracking each item from the time of purchase through to when the wine is bottled. Meticulous record-keeping, data collection, and data segregation make specific identification highly accurate.

Starting with the calculation of exact juice or wine yields for each varietal vintage, even getting detailed down to which vineyard or vineyard block, you then track the juice into the individual barrels for each lot, parsing and combining as barrels get blended.

Weighted or Average Cost

When costs are intermingled and difficult to specifically identify, using the average cost method may work best. Using the average or weighted average for consumable supplies like yeast and sulfur or general costs like storage is appropriate.

First-In First-Out (FIFO)

Another valuation method is the FIFO method, which assumes that inventory moves such that the oldest stock (the first in) is the first sold (the first out).

Last-In First-Out (LIFO)

As you might guess, the LIFO method assumes the newest inventory items (the last in) are the first to be sold (the first out). This is unlikely the case in the wine industry since older vintages are typically sold before newer ones.

Specific identification and FIFO are the most commonly used valuation methods for wineries.

Using LIFO for tax purposes requires you to use it for financial reporting purposes. This can be achieved while still using the specific identification or FIFO method by recording a LIFO reserve on your books.

Recent changes in the tax code for expensing of certain winemaking costs make consulting with your CPA very helpful.

Regardless of which inventory valuation method you use, use it consistently. Consistency is required for U.S. GAAP reporting and makes spotting an error easier.

Valuing winery inventory is challenging and unique. It requires specialized knowledge acquired through years of experience. The professionals at Protea have decades of experience helping winery owners with complex accounting and tax issues. Reach out today to see how we can help you.

Preparing Your Winery for Natural Disasters

Preparing Your Winery for Natural Disasters

It’s been a tough summer. First, the COVID pandemic slowed down commerce, and most recently the massive wildfires are burning throughout Northern California. This year’s fires came earlier than they historically have and this early arrival means grape harvesting is caught in the crossfire. 

Many winery owners are rightfully nervous about what the future holds and are thinking about what they can do to protect their business. Fortunately, the government has stepped in to help businesses impacted by the wildfires and there are numerous action steps you can take today to help prepare you and your business for future natural disasters.

Extended Tax Deadlines

The IRS recently granted some relief to taxpayers impacted by the California wildfires.  It extended the filing deadline for all tax returns and payments that were due starting on August 14 through December 15. The new deadline for these returns and payments is December 15. The California Franchise Tax Board followed suit and issued a similar extension.

So, C-corporations that timely filed for an extension to file their annual tax return would have had to file by October 15. The new deadline is now December 15.

Likewise, S-corps, partnerships, and sole proprietors would have had to file by September 15 but now have until December 15 to do so.

Any estimated income tax payments that would have been due on September 15 are now bumped back until December 15.

Those 3rd quarter payroll tax returns and any payment that would have been due on October 31 are now due by December 15.

If your county has been declared a federal disaster area by FEMA, you will receive this automatic extension. This new extended deadline is automatically applied by the IRS and there is no need to file any paperwork.  As of September 2020, FEMA has declared the following counties federal disaster areas: Sonoma, Napa, Lake, Yolo, Butte, Solano, San Mateo, Santa Cruz, and Monterey.

All penalties and interest will be waived so long as you file all your returns and pay all your tax by December 15. 

Disasters and Insurance

Most wineries have multiple layers of insurance protection. Property, business interruption, and viticulture policies just to name a few. 

Now might be that time you need to make use of your insurance. If you’ve suffered damage from the wildfires, contact your insurance agent right away. Many property insurance policies cover natural disasters like wildfires. And some policies will cover a portion of lost revenue and increased expenses due to business interruptions.

Reviewing your insurance needs should be a regular occurrence. And if you haven’t had that conversation with your agent in a while, now is a good time. Talk through all your business needs to craft the coverage that’s right for your winery. 

Disaster Preparation

It’s never a fun topic to discuss but disaster preparation and plans should be an important part of your winery’s business strategy. With a proper plan and early preparation, you can lessen the chance of being negatively impacted by a natural disaster.

Regular Maintenance Is a Must

Winery owners should make sure their property is in the best possible shape to withstand any natural disaster. Repairs and maintenance should be made regularly, including clearing fallen debris and removing dead or dying landscaping. 

Create a Continuity Plan

Have a plan in place to communicate with winery staff in the event of an emergency. Create a contact list with all employee’s names and phone numbers and establish procedures about how communication will happen in the event of a disaster. Don’t forget to consider how you’ll communicate with customers and suppliers. 

Have a point person at your winery who is responsible for monitoring natural disasters. This person should have clear authority to make decisions about the safety of your crop, inventory, and staff. 

Ensure your plan includes how you’ll protect your equipment, buildings, and inventory.

Protect Your Electronic Data

With so much of your business data stored electronically, be sure that it’s backed up regularly. The backup should happen off-site so that in the event your computers and servers are damaged, you’ll still have access to all your records.

If you’ve been hesitant to use the cloud to store your data, consider making the switch. Most cloud storage providers make multiple backups each day and access is easy from anywhere you have an internet connection. Cloud storage could help your employees to continue working even if your winery has been evacuated or damaged from a natural disaster.

Document, Document, Document.

Keep thorough and complete records of all your business assets and keeping pictures of all your assets will help if you have to make a claim to your insurance carrier. 

You’ll want to document:

  1. The type of asset, including model number and serial number, if applicable
  2. The year it was placed in service
  3. The price you paid for it
  4. Any customizations made to the asset

A good place to start would be using a fixed asset schedule or report. If you don’t keep this schedule, your tax accountant should have a copy. 

Keep in mind all your assets might not be on the fixed asset schedule. Inexpensive equipment like computers or office furniture may not be on the fixed asset schedule, but you’ll want to keep track of those, too. 

Managing and Protecting Inventory Before a Disaster

Inventory is one of the largest assets a winery owns. With a robust inventory management system, you’ll know exactly what you have, and protecting your inventory from a natural disaster should be included in your contingency plan. 

Your wine racks should be sturdy enough to withstand the shaking of an earthquake or strong winds from storms and your wine inventory should be well organized and labeled correctly. 

Keeping your inventory system up to date and organized will be helpful in the event you need to file an insurance claim. 

Your inventory management system should know the exact dollar value of all your inventory at any given moment.  And if you hold a large amount of inventory, ensure your insurance policy covers all of it.  A report with your costs and quantities can be created quickly.

If your business has been affected by the wildfires in California or you could use a helping hand with your business strategy or accounting, get in touch with Protea now.  Our professionals are experts at bookkeeping for wineries and work tirelessly to ensure your financial goals are met. Learn how outsourced accounting and bookkeeping can save your winery time and money. 

Why Customer Retention is Imperative For a Winery

Why Customer Retention is Imperative For a Winery

The primary goal of many wineries is to develop, cultivate and produce products that promote repeat business and retain customers. Wineries exist to satisfy customers’ needs through products or services and it’s important for a winery to retain these customers. Since we operate in a competitive business environment, it is important to identify how we can increase customer retention levels.

Let us first define customer retention:

Customer retention is a combination of intentional repurchase behaviour and psychological attachment of a customer to a particular product or service (Al-Hawari 2005:231; Peelen 2005:239; Godson 2009:72; Cant & van Heerden 2010:444). McManus and Guilding (2008:779) also define customer retention as an attitude where a customer’s attachment to a product, service, brand or company is developed. According to Zhang, Dixit and Friedmann (2010:128), customer retention is the likelihood of a customer choosing a particular brand with reference to his/her past purchases.

Why is customer retention important?

Retaining existing customers is cheaper than acquiring new customers.

By retaining customers it allows a winery to generate more profits with each additional year of the customer-relationship. Research has shown that 12 – 15% of customers are loyal to a single retailer, but these customers represent 55 – 70% of total sales, and the only way to increase customer retention is to increase customer satisfaction. Satisfied customers have the tendency to return to the same store and they end up buying the same product.

What happens when customers are dissatisfied? The negative aspect of customer dissatisfaction is that customers lower their expectations when buying from the same winery or stop buying from the winery completely.  Conversely, customers that are satisfied have the tendency to return and possibly refer new customers to your winery. As a result, the winery increases its customer retention and lowers customer acquisition costs, which in turn increases the profit of the business. One of the focal points of a winery should be on customer satisfaction as it can possibly yield greater profitability than customer acquisition strategies.

The question then remains, how to satisfy customers and develop a winning customer retention strategy?

Provide quality products

Quality is more than just producing a quality product. The quality of a product should be customer-driven. What is the customer looking for exactly and how do they define quality? It all comes down to how the customer experiences the product. It is important to note that the higher the quality of the product, the more likely a customer will be satisfied. Quality is also not something that you can improve overnight. Take for example the comparison of wine produced in the early 19th century to today’s wine. The use of modern-day technology, a variety of cultivars, viticulture, and overall winemaking experience allows us to produce outstanding quality wine. It takes time to design and build a quality product from the ground up.

Customer service

Customer service is intricately associated with good quality products. It is important to respond timely to the disgruntled customer and resolve their issue promptly. Customer service is one variable that you can easily control and oversee. Implement standardized service response systems that can deal with inquiries and complaints promptly. These response systems and remedial actions are vital to realize increased levels of customer satisfaction. Your ultimate goal should be to decrease your customer service queries, this in turn evidences that you are producing a quality product. An investment in quality and perfecting your product will reduce your need to deal with customer complaints.

Training and preparation are key

“He who fails to plan is planning to fail!” – Sir Winston Churchill.

It is important to train employees and convey to them that customers are the ultimate judge of quality. Provide employees with a detailed guideline and proper training on how to deal with disgruntled customers. This is especially important as these employees will be representing the brand and they have a big influence on how a customer can perceive the brand. It is important to listen to what the customer is complaining about and utilize this information constructively to improve the overall quality of your product.

Build a relationship of trust with the customer

When a customer trusts the product, the quality, and the brand, they tend to share their experience with family and friends. A case study by Nielsen found that 92 percent of people trust recommendations from friends and family above all other forms of advertising when making a purchase decision. Therefore, nothing comes close to the influence of word of mouth, and satisfied customers share their positive experience with more than five to ten people. Customers need to be able to trust what they buy. By building trust you are providing your customers with something of value which leads to a positive trend towards brand awareness. The winery sales team needs to be thinking about how to deepen the relationship with their customers, especially when they are not in buying mode.

Use automation to your advantage

There is no doubt that technology is there to help us. Try to make use of automated marketing software to engage, re-engage, and keep your customers up to date on what’s happening with your winery and products. Specifically, success stories at wineries have been reported using Customer Relationships Management (CRM) software such as Salesforce, Hubspot, Commerce7, WineDirect, and eCellar. All these CRM systems complement a full marketing methodology for wineries.  Make sure to use standardized email newsletters, event notifications, gated content, promotional emails, abandoned shopping cart reminders, and survey emails. Marketing automation will keep you one step ahead of your competitors by communicating more effectively and efficiently with your customers.

Use social media to your advantage

Social media can power your brand forward but can also be detrimental to your brand. Use social media to research your target audience, analyze your competitors, create engaging content, generate website traffic and grow your audience. Make use of customer reviews online and utilize this space to promptly deal with issues customers may have. By promoting brand awareness online, you create credibility and build trust with customers based on your online activity.

By implementing the above strategies, a winery can increase customer satisfaction, leading to an increase in customer retention. In today’s fast paced competitive market, the wine industry needs to focus their efforts on retaining customers and realise the importance thereof.

References:

Al-Hawari, M. 2005. The effect of automated service quality on bank financial performance and the mediating role of customer retention. Journal of Financial Services Marketing, 10(3):228-243.

Cant, M. & van Heerden, C. 2010. Marketing management. Cape Town: Juta.

Godson, M. 2009. Relationship marketing. New York: Oxford.

Magatef, S. & Tomalieh, E. 2015. The Impact of Customer Loyalty Programs on Customer Retention. International Journal of Business and Social Science, 8(1):81.

McManus, L. & Guilding, C. 2008. Exploring the potential of customer accounting: A synthesis of the accounting and marketing literatures. Journal of Marketing Management, 24(7/8):771-795.

Peelen, E. 2005. Customer relationship management. Essex: Pearson.

Zhang, J.Q., Dixit, A. & Friedmann, R. 2010. Customer loyalty and lifetime value: An empirical investigation of consumer packaged goods. Journal of Marketing Theory & Practice, 18(2):127-139.