Is Your Wine Business Prepared for 2004?

By Douglas Hart, CPA and Wendy Petersen, CPA

Leading indicators suggest that the economy is picking up speed and better times may lie ahead.  Is your wine business well positioned financially to take advantage of opportunities that will develop as the economy recovers? Now is the time to get your financial house in order as we move into 2004.  Our “Top Ten” list of strategies may help you achieve success in the New Year.

  1. Rationalize the number of your varietals and products - As distributors focus on top brands, wineries’ efforts should be oriented toward their core products.  Spending time and energy on your weaker labels drives increased internal costs and may dilute your pull with distributors.  In our experience, wineries that focus on fewer products are more successful than those who try to be “all things to all people.
  1. Manage distributor discounts and depletion allowances - Discounts and allowances can quickly get out of hand unless they are carefully controlled and managed.  If you choose to enter into an allowance program, tie the payment of the allowance to the distributor to your desired sales results if possible.  Examples of this are rebates based on sales volumes or cooperative advertising programs requiring proof of advertising before reimbursement.

Failure to track and forecast such allowances may result in cash flow shortfalls. In order to avoid such unpleasant surprises, you must ensure that your sales and finance functions are in close communication and that such allowances are accurately tracked.

  1. Promptly address recent tax law changes - The tax law passed in 2003 created great opportunities for wineries.  In addition to federal income tax rate reductions for individual owners of flow-through entities, wineries have the option of expensing 30% or 50% of qualifying capital asset purchases under the bonus depreciation provisions, and expensing up to $100,000 under the asset expensing provisions.  These, and lesser-known tax law changes, have made tax planning more challenging than ever before, yet they provide tremendous opportunity to manage your tax burden.
  1. Proactively manage banking relationships - Accurate financial forecasting has always been important but it is imperative now in light of the challenges of the last few years.  Armed with precise financial projections, you can identify financial shortfalls in advance to allow time for renegotiation of bank credit lines and debt covenants.  A key element of forecasting is identifying any future losses or investments, such as bulk wine sales or vineyard costs, and communicating those items to your lender. Accurate forecasts and timely communication establish a winery’s credibility – a critical issue when lenders are looking to prune their client lists.
  1. Conduct family succession/strategic planning - Family-owned wineries must have clear succession plans that link estate tax planning to business continuity strategy.  With current winery valuations at a low point, now is the time to leverage use of the $1 million gift exemption to make transfers to children and save estate taxes.
  1. Optimize financing structure - Are you land rich, but cash poor?  Does it make sense to mortgage some of your property to reinvest in your business?  Should you take advantage of low interest rates for capital investments?  Increasing borrowings can be risky anytime, however, calculated risk can yield significant benefits in a recovering economy.
  1. Compare your performance to your peers - When times are good, increasing sales may mask inefficiencies.  In difficult times, inefficient business practices can result in business failure.  Being able to compare your operating metrics to other peer wineries is a great way to identify areas of business improvement.  How does your bottling cost per case compare to your competitors? What is your headcount vs. your peers?  Do you have underperforming brands or varietals?  Asking these questions may highlight significant profit improvement opportunities.
  1. Review vendor relationships - You need vendors who act as partners and are committed to your business relationship through economic highs and lows.  Are your vendors cost competitive?  Do they provide added value?  Does it make sense to renegotiate grape contracts or other outsourced services?  Asking these questions will help you evaluate whether your current vendors are doing enough to help your business.
  1. Consider electing LIFO inventory costing to save income taxes - LIFO (last-in, first-out) refers to a method of inventory costing where the IRS allows you to accelerate deductions for inventory sold when production costs are on the rise.  Many wineries already use the LIFO method.  However, if you are not on LIFO, this is a good time to consider making the election.  If you believe that grape prices, being at a relatively low point presently, are due to increase in the future, election of LIFO in 2003 will lead to future tax savings.
  1.  Get your books in order - In the post-Enron world, your accountants, board and bankers have much higher expectations relating to the accuracy of your accounting records and the strength of your internal controls.  Inventory write-offs and vineyard losses should be identified and communicated to your bankers, owners and other financial constituents.

Hopefully, many of you are already using some of these strategies to achieve financial success.  If not, now is the time to identify which of the “Top Ten” are appropriate for your business. 

Doug Hart is a partner in charge of the audit practice at Motto Kryla & Fisher LLP, a CPA services firm specializing in the wine industry. Prior to joining MKF, Doug was with the Big Four accounting firm, KPMG, for over 20 years and was Partner in Charge of KPMG’s Consumer Industries Practice for the Western Region for the past ten years.  He can be reached at (707) 967-5316 or dhart@mkf.com

Wendy Petersen is a tax partner, and director of the CPA Services practice at MKF.  Wendy has been with MKF over 5 years, helping wineries and vineyards manage their tax burden.  She has specialized in taxation for 14 years, most of which have focused in the wine industry.  She holds a Bachelors Degree from Sonoma State University, and a Masters in Taxation from Golden Gate University.  To contact Wendy, call (707) 967-5327 or email to wpetersen@mkf.com