The use of relevant financial ratios helps winery owners accurately evaluate their business performance.
Business analysis helps winery owners and managers evaluate their winery’s financial performance throughout the year. While there is no universal agreement among experts on which ratios to use in a financial analysis, this posting represents the key financial ratios that I think are most useful to winery operations. I have divided these ratios into categories of retail sales, wholesale sales, cost control, inventory, capacity, financial leverage, and profitability.
Retail Sales
I have already profiled these ratios in my previous blog posting, Tasting Room Profitability: Sales Data Analysis. Please check out that previous post to see why number of visitors, number of purchases, average transaction size, and conversion rate are very important retail sales data.
Wholesale Sales
Most wineries use a distributor to fulfill their wholesale sales. Other than top-line measurements (growth in wholesale sales or growth in case sales), one really has to pay attention to cost of goods sold, the cost of sales, and the gross margin received through the wholesale channel. Key measures to consider are the following:
- Wholesale marketing—are you tracking depletions, buybacks, and promotions?
- Wholesale cost of sales—if you are not using a distributor, are you tracking delivery costs?
- Wholesale gross margin {Wholesale sales – cost of goods sold – cost of sales}
Cost Control
Almost every vintner worries about the cost of goods (grape costs, packaging costs, barrels, chemicals, yeast, etc.). The real culprit in cost overruns, however, is labor cost. Labor costs for a winery operation can run higher than 30% of sales. The vineyard is even worse since the cost of grapes produced in the vineyard can run as high as 80% of the value of the entire crop! So when I look at cost control measures, I typically focus on the following points:
- Labor as % of sales {total labor/gross sales x 100}
- Vineyard labor as % of grape value {vineyard labor/total grape market value x 100}
- Winemaking staff costs per case produced {winemaking staff costs/total cases produced}
- Cost of Grapes from Vineyard (per ton) {total vineyard costs/total tons harvested}
- Retail staff cost per case sold {total retail staff cost/retail cases sold}
- Wholesale staff cost per case sold {wholesale staff cost/wholesale cases sold}
Inventory
One of the hardest parts of running a winery is that inventory is a black hole, sucking up almost all the available cash. The trick is to move the inventory quickly enough to sustain the cash flow of the business. These measures give us a clue about inventory management:
- Inventory turnover ratio {Cost of goods sold/average inventory}
- Average age of inventory {365 days/inventory turnover ratio}
- Years of sales in inventory {Sales value of inventory/annual sales}
Capacity
Capacity refers to the volume of wine sold and how that relates to overhead costs and capitalization of the winery. Overhead costs are those costs not directly tied to cost of goods sold (e.g. interest, depreciation, taxes, insurance, repairs, etc.). These ‘hidden’ costs are what get a small winery in trouble, since these costs are no different at a 1000-case winery as they are at a 7000-case winery. To make sure a winery’s capacity is in balance with its overhead costs, I keep my eye on these measures:
- Overhead costs per case sold {overhead costs/total cases sold}
- Overhead expense ratio {overhead costs/gross sales}
- Asset turnover ratio {gross sales/total winery assets}
Financial Leverage
Winery businesses are very capital intensive—meaning you have to spend a lot of money in order to get started and established. No matter what business you are in, I always say that the least money you need to get started, the better. Financial leverage ratios let managers know how debt commitments impact their operations.
- Working capital including inventory {current assets – current debt}
- Working capital excluding inventory {current assets – inventory – current debt}
- Term debt and capital lease coverage {(net cash income + interest)/loan & lease pmts)}
- Market value debt to asset ratio {Total Assets (market value)/Total Debt}
Profitability
Honestly, if the above measures are in line, then profitability is the result of good performance in all the other areas. That being said, the profitability measures that mean the most are simply net profit (in dollars and percent) and net profit per case sold. The only other tweak is that you should look at the profitability of each enterprise (winery, vineyard, events, etc.) and each distribution channel (retail, wholesale, off site sales, internet sales, etc.).
Financial analysis provides valuable insight into a winery business, but it does have a drawback—the analysis must ultimately be compared to similar businesses in the wine industry. In this manner, financial performance can be ‘benchmarked’ against a standard of performance. If you would like to take your financial analysis a step further and participate in the Winery Benchmark™, please visit the Winery Benchmark page for more details. You may also call me, Steve Richards, anytime at 1-800-929-7102 or email me at info@wineryprofitability.com if you have any questions.
