Our CPA firm teaches free training classes to Napa Valley Winery owners and their teams. We just completed a class called Making Sense of Winery Financial Statements in which we asked attendees to review the above (red neck winery case study) financial statements. This was done at the beginning of class, before we gave them any instruction.
We asked them two questions:
What can you learn from these financial statements?
What do you need to know but can't answer from these statements?
Based on our decidedly unscientific survey, there is more information missing from the financial statements than appearing on it.
These business owners, like many others we have trained over the years, struggle to make sense of our main deliverable, financial statements. They want more context around their business results.
They had unanswered questions like:
Why I am making less profit than last year?
Is this good? How are others like me doing?
What should I be producing in gross margin?
What should I spend on marketing?
What is the average cost of farming per acre in the Napa Valley?
What changes should I make to improve my results?
Do I need to hire more employees?
Would a banker lend me money?
For us, the most critical question for a business owner was
"What would you do differently tomorrow based on the information provided on these financial statements? "
Other than cutting expenses and firing all of the staff, there was consensus among the group that
no obvious actionable strategies could be gleaned from the financial statements themselves.*
Financial statements are not enough.
Business owners need different information. They want visual data, benchmarks, what-ifs and information presented in plain English. They want to help their teams understand the connection between their individual actions and financial results. And mostly, they want to work with accountants (both inside their organizations and outside) who know how to provide this information in a way they can understand.
In class, we shared key ratios and walked through different tools and dashboards (like Fathom, $COPE It! ™ and the Profit Equation Planner™ from Mentor Plus.) We also shared our own BDCo scorecard using normalized data that we compile and deliver to our top customers.
All of these tools are designed to provide insights that lead to changes in behavior, new actions, and improved results. They have Key Performance Indicators (KPIs) including financial and non-financial measures, (which for wineries include things like the number of visitors or the number of tours per day) which are usually leading (not lagging) indicators of future business success.
Using these tools we were able to offer our sample winery the following answers to the 8 questions above:
Why I am making less profit than last year? Your cost of wine sold has increased over last year by 2%, result in lower gross profit. At the same time your operating expenses increased, leading to lower net income. ($COPE It! and Fathom)
Is this good? How are others like me doing? You are showing a loss, while other Napa Valley wineries of your size are able to generate a bottom line profit of about XX%. (BDCo Scorecard).
What should I be producing in gross margin? It varies by type of winery operation, but in general, your margins are lower than the industry average of XX% by 5%, but you are under-performing the industry's highest achievers by 12%. (BDCo Scorecard).
What should I spend on marketing? You should spend as much as it takes to drive the revenues you have planned for the current year. (You need to know the relative return on different marketing investments. We can help you make those calculations.) We are seeing smaller wineries spend around X% of revenue on direct marketing. (BDCo Scorecard).
What is the average cost of farming per acre in the Napa Valley? We are seeing costs of around XX for wineries like yours. Your costs exceed that by $200 per acre. (BDCo Scorecard).
What changes should I make to improve my results? In order to achieve positive operating cash flow, you must first generate a profit, which can be accomplished by increasing your effective price per unit, selling more wine, or reducing expenses. Once you have generated a profit, you also need to reduce your Accounts Receivable Days Outstanding and monitor the relationship between production and sales so that Inventory doesn't grow faster than sales. ($COPE It! and Fathom tools)
Do I need to hire more employees? If you keep the same number of staff, the same number of visitors to your tasting room, but increase the sales per customer by one bottle per day, you can achieve your revenue targets. (Profit Equation Planner by Mentor Plus as modified for individual wineries.)
Would a banker lend me money? No. Your debt to equity ratio and negative operating cash flow (which is on the Cash Flow Statement that no one ever reads) results don't bode well for a traditional bank loan. ($COPE It!)
There is plenty of opportunity in our industry for accountants who look further than the financial statements, who learn new skills, invest time in finding the right tools, and learn how to communicate financial information in a way that works for their clients. Your clients have questions that need to be answered. Are you ready to answer them?
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*We provided summary financials on purpose - we wanted to make a point. We explained the difference between financial statements that satisfy the basic GAAP standards, and those that provide meaningful managerial information with enough detail to drive decisions.
About the author : Geni Whitehouse is the Countess of Communication at www.bdcocpa.com
About BDCo
BDCo is a different kind of accounting and advisory firm. We live and work in the Napa Valley and specialize in wine industry accounting. But it goes deeper than our industry expertise. It starts with our beliefs : We believe customers have the best answers. So we listen to them.We believe employees have the best ideas. So we trust them.We believe Napa Valley is the best place to work, live and visit. So we work to protect it. We live to enjoy it. We savor the company.
