Tracking your winery’s performance is the foundation of running a profitable business and ensuring the longevity of your company. Without careful planning and accounting, costs to make wine can quickly get out of hand and cut into your profit margins. For this reason, it’s important to understand and track the production and profits of winemaking.

Simply put, the cost of wine is determined by how much you can charge consumers for your product and how much you have to spend to make and sell that product. The cost of wine is largely dependent on your market, leaving little room for expanding profit in that area. However, you can exercise control of your production costs, including labor, materials, and overhead. Winery accounting can help you find lost opportunities for profit within your production costs.

Challenges to lowering production costs

It’s not quite as simply as just deciding to spend less money, of course.

There will always be a cost of doing business, so finding where you can reduce costs takes time, thoroughness, and consistency. By working diligently with a winery bookkeeping professional, you can discover your best path forward.

You will need to decide how much you much to spend on production overall. You will need to make decision on how much to spend on grapes, glass, label, closures etc. Then, you must decide how much money is going to be allocated between different departments to run the business and sell the wine. You must track the costs of your winery throughout the process. This can provide particular difficuly due to the overlap between overhead, production and material costs.

Finally, it’s key to track the movement of your inventory. This includes keeping tabs on what materials and labor went into creating specific vintages and blends.

The basics of allocating costs

Beverage industry accounting/bookkeeping breaks down costs into two main groups. These are known as COGS (cost of goods sold) and COGP (cost of goods produced).

What’s the difference? COGP refers to the costs associated with wine in the process (WIP). This includes ongoing costs related to grapes or juice, labor, overhead, dry goods, and bottling.

By contrast, COGS refers to all the costs incurred per bottle of wine sold. This can be attributed to COGP of particular varietals or vintages sold and costs included in selling the wine and getting it to the customer.

Knowing the COGS is essential if you want to know the gross profits you earn on different wines. You can take the price of a sold bottle and subtract the COGS to determine the gross profit you earned. Lowering your overall COGS will help increase the business’s profit margin, but there are plenty of considerations to carrying this out successfully.

Major categories of winery costs

To make matters simpler, winery costs are broken down into specific cost categories according to steps in the winemaking process. The three main steps are 1) crushing and fermenting, 2) barrel and cellar aging, and 3) bottling and labeling product. Each of these steps can be further broken down. At each stage of production, there are costs for materials, labor, and overhead. If you own both a vineyard and a winery, vineyard accounting reports ought to be included in these costs.

By tracking your investment and usage in these aspects of production, you begin to get an accurate idea of the COGP for the wines you sell. As we delve further into the complexity of winery costing, it’s important to remember that consistency is crucial. However you elect to track production, it should be carried out consistently.

Materials

There are a variety of materials used in each step of production. This includes the cost of grapes, purchasing bulk wine, and dry goods like glass and closures. Specific materials are assigned to separate wines and must be accounted for at a SKU level.

Labor

Labor costs should include any benefits, salaries, wages, and payroll taxes paid by the winery. If your facility has its own vineyard, then the labor expenses calculated through vineyard bookkeeping should pool into the total labor cost. You must pay all workers involved in facility maintenance, production, winemaking, and bottling.

It can be more challenging to figure out the labor costs for owners and executives. These people are more likely to float between departments and take part in administration as well. Most often, a portion of the profit from each department the individuals regularly attend to will be pooled to provide a total salary.

Overhead

Winery overhead costs include rent or the depreciation of owned property, building insurance, repairs, maintenance, property taxes, cleaning supplies, and general services needed to maintain the quality of the facility. Of course, there are expenses shared between departments for facilities, equipment usage, and utilities.

Some businesses struggle to accurately divide the costs among departments. However, it’s common practice to divide facility costs and insurance by the square footage in each department. For example, if the packaging section of your facility has 30% of the floor space, then 30% of the rent cost is allocated to that department. Utilities are best broken down by actual consumption in production steps unless all departments are operating on nearly equal power usage.

Navigating the breakdown of costs is certainly a complex practice. However, developing and maintaining a consistent system is. Over time, a good system will evolve to accommodate the nuances of increased production as the winery expands.

Methods of inventory accounting

Tracking inventory presents unique challenges to wineries that a lot of other businesses in the beverage industry don’t have to contend with. Due to the aging process of wine, there is a significant lag between producing the product and selling it. This can be especially challenging, as winery inventory accounting may stretch over several years for each vintage, across all the stages of production.

There are four main approaches to navigating this hurdle. One of the most common is first-in, first-out (FIFO), in which it’s assumed that oldest materials are used first. Specific identification (SPID) depends on tracking specific grapes, materials, and packaging through the production of each wine (this is the preferred method of accounting).

Last-in first-out (LIFO) is relatively uncommon since it assumes the newest materials are used first. Average cost is a system in which all purchases during a set time period are assumed to have an average cost.

Developing financial reports

Once you’ve tracked all costs by wine, department, and stage of production, that information must be put into financial statements. These are kept as part of your financial record to continue tracking the ups and downs of production and profit. You can reference these as often as necessary to identify patterns and lost opportunities for profit.

Most wineries develop a flow of financial statements. The labor, materials, and overhead of earlier stages often transition into later stages of production. Tracking and grouping those costs can help identify how they compound throughout the winemaking process. All this information comes together to reveal a complete picture of where every dollar goes within your business.

Protea experts are here to help

Winery accounting is a complex process that can take years of education to fully understand. We can provide relief from the stress of accounting and bookkeeping with our financial experts with extensive experience in the wine idustry. After all, your business is counting on your vineyard and winemaking knowledge to succeed and grow. Our team is here to support you every step of the way by tracking the details and providing you with the information you need to make important decisions. Reach out today to speak with one of our Protea consultants.