Peter MacIntosh
Owning and operating a winery requires a significant amount of capital investment. Initial start up costs are substantial, such as establishing vineyards and paying for winery buildings and equipment. Furthermore, it can be several years from first expenditures out in the vineyard until you get to sell a bottle of wine and convert your efforts back to cash. In the world of winery ownership, understanding, planning and continually managing your cash flow is vital to not only success but survival.
We have the privilege of encountering a lot of people that are involved in the wine industry. One shared trait that we see is a passion to make great wine. What we impress upon them is that their passion for making a great wine must be equaled by a passion for selling the wine. One of the quickest ways to run out of money is to build up a large inventory of unsold wine. Establishing reasonable sales targets as well as sales distribution channels must be the starting point of any winery business plan.
Monitoring the cash flow of a winery is equally as important as monitoring profitability due to the large seasonal expenditures involved. We suggest, as a minimum, that a 36 month cash flow plan should be drafted and continually monitored that addresses the following:
- Normal monthly operating expenses such as wages, rent, insurances, supplies;
- Seasonal expenditures such as harvest wages, bottle or barrel or grape purchases;
- Capital expenditures such as planting costs, equipment purchases or winery building expansions;
- Any increase in costs related to a planned increase in production;
- Factor in, as much as possible, fluctuations in crop yield and selling prices;
A cash flow projection does not have to be a complicated thing. It is normally a spreadsheet that lays out, on a month by month basis, projected cash inflows and cash outflows. For example, you would identify cash that you project to receive from wine or grape sales as well as cash injections from lenders or owners. You would also estimate your normal monthly operating expenses as well as any large seasonal expenditures or other capital outlay such as equipment purchases or planting costs. The number at the end of each month is either positive or negative.
The benefits of using a cash flow projection are many. A cash flow projection will allow you to effectively manage the times when your cash reserves are low as opposed to being caught off guard and harming your ability to operate your business. Other benefits are as follows:
- Identify a need to obtain bank financing ahead of time as opposed to at the last minute
- Allow for proactive planning for large capital expenses
- Identify whether the financial resources exist to increase production or, perhaps, identify the need to decrease production
- Identify the need to have owners inject cash into the business
Another important aspect of cash flow planning involves how you pay for different types of assets. As a general rule you want to match the payment of the asset or expenditure with the expected cash flow for that asset. You want to pay or finance short term assets or expenditures with short term money i.e. paying wages from cash generated from operations. You want to pay or finance long term assets with long term money i.e. financing equipment over its expected useful life. Some agricultural lenders will defer payment of principal and interest on loans that are used to establish vineyards for up to five years. These lenders understand it takes that amount of time for a new vineyard to produce grapes that can be used to generate cash. Demanding payment before that time creates a cash flow burden on a winery.
We regularly work with our winery and vineyard clients to assist them with cash flow planning. Establishing methods to monitor and manage cash flow is vital to managing relationships with lenders. More importantly, properly managing cash flow will allow you to deal with the financial requirements of running your business. In the world of wine, more so than in other businesses, cash is king.
Peter MacIntosh, CPA, CA is a partner with White kennedy LLP.
White Kennedy has offices in West Kelowna, Penticton and Osoyoos. Peter can be reached at 250-492-9984 or by email at pmacintosh@whitekennedy.com