Budgeting for Your Distillery Is Sexy
A budget is your financial roadmap to achieve your company's goals. When working with a new client, my first question is "Do you have an annual budgeting process?" A budget is a guideline in dollar terms, so companies can see if they are on track to meet expectations and serves as a management tool. It is central to measuring financial performance.
A strategic and management tool
Typically, the budgeting process follows a strategic planning session. While the broad goals are identified during the strategic planning session, the budget process translates these ideas into defined financial goals. The broad goals are fleshed out into specific strategies for each division, and financial targets are assigned to each strategy. In addition to clarifying the company's goals, the budget process is an in-depth examination of whether the goals are achievable.
Each department head is responsible for writing their own budget that aligns with the company's goals, thus creating alignment within your team. Knowing that he or she will be accountable for the budget, the department head will usually have more buy-in for company goals than would otherwise be the case.
Budgets can be used to drive accountability. During monthly financial reviews, review department-specific reports of budget versus actual so that each department head is held accountable for their performance. The compensation structure should be tied to the individual's ability to manage the budget.
Winery budget flow chart
Sales set the tone and all other budgets are derived from sales forecasts. Project your sales for the coming year by distributor, SKU and month in case equivalents or proof gallons. (If you have a restaurant or taproom, each location should be considered a separate distributor).
In the winery flowchart (Figure 1), the first two rows are the revenue centers and the bottom three rows are the expense centers. Create a separate budget for each item on the flowchart. These will be combined into one master budget by the CFO.
In summary, there are three steps to the budget process.
l Create departmental budgets
Start with an Excel-based template and have your revenue center department heads complete it. This is usually your Sales Director and Brewery Manager. Then provide a template for your winemaker or production supervisor to create production schedules, raw materials and labor budgets.
Meanwhile, the tasting room manager and marketing manager are responsible for their cost budgets, the sales director is responsible for the department's cost budget, and the CFO is responsible for the administrative budget and capital expenditure budget.
All these budgets have to be compiled and revised several times to have a final budget. (Table 1)
Table 2 shows a suggested timeline for the budget process. It is expected that the process will take two to three months.
Budgeting raw materials for your winery
In your production planning software, output a report showing the average COGS for each brand of wine produced in the previous year. then use this average historical unit cost and multiply it by the projected number of brands to be sold each month. Be sure to take into account changes in raw material costs, changes in packaging materials, supplier selection, inflation-induced cost increases, etc.
Create a tasting room template
A budget template for a restaurant or tasting room typically starts by assigning costs as either fixed or variable, and then forming assumptions about how those costs will increase or decrease based on historical data. For example, if the general manager position is salaried and you expect to give the position a 5% raise, then project the costs for the upcoming year to be 105% of the same period the previous year.
Putting it all together
Once departmental budgets are created, the CFO will combine them into one overall budget. The budgeted profit and loss for each department will be a separate tab in the same Excel workbook. Create a summary P&L that combines the data from each departmental tab. Once the consolidated P&L is created, projections can be made for the balance sheet and cash flow statement.
Seeing all the data accumulated into a set of projected financial reports reveals where adjustments are needed. Do you need to increase capital expenditures to meet sales targets? Are there months where cash is falling too low? Are you still able to meet your bank covenants each quarter?
Answering these questions and developing solutions to problem areas requires a concerted effort by the leadership team. After several rounds of revisions, the result is an intentional roadmap that guides the company closer to its goals.
From Budget to Forecast
A budget is a plan for a static set of circumstances; current performance is measured against outdated expectations. A forecast is a plan for a flexible set of circumstances. Current performance is measured against recent actual results.
The budget is usually developed in the fourth quarter of the previous year. It is static and does not have the flexibility to adjust for unforeseen changes. Examples of changes that may occur include distributor consolidation, changes in consumer preferences, and shortages of packaging materials. When reviewing budgets versus actual reporting, you are comparing performance in the current situation with performance in the old situation. Measuring your performance against a budget is fixing your expectations in the past. You are looking in the rearview mirror. Rolling forecasts, on the other hand, keep your head up as you scan the horizon; you're moving into the future. As Wayne Gretzky, founder of the National Hockey League, puts it, skate to where the puck is going to be. In the forecast, you'll get monthly updates as actual results are released and better information is available to predict what to expect for the rest of the year.
Creating a Winery Forecast Model
Forecasting does not replace the need for a budget. Budgets can be used as a starting point for forecasting. Updating the forecast on a monthly basis will allow you to adapt to the pace of the business and predict what will happen becomes less mysterious. There is no need to reforecast the entire budget every month; high-level forecasts are just as effective. For example, you can forecast only the big ticket items such as revenue, COGS, labor and operating expenses. Choose the level of complexity that is appropriate for your business. Forecasting models can range from very simple to extremely complex. Choose the level of detail that will give you the most benefit.
The practice of forecasting allows you to stay attuned to the pace of your company. You get a sense of how quickly your organization can turn around. You gain a sense of the key metrics for your business. Creating a forecast doesn't mean you have to make a budget every month. Instead, focus on the big account categories. If you see a category that is outside of a reasonable range, then you should drill down into the details to get a clear picture.
In Table 3, the actual data for two months and the projected data for three months are shown below. This is a condensed example of the portion of the forecast that in reality would last 12 months. Note that this model combines elements of the income statement and balance sheet, allowing you to see the impact on cash in one report. This is not a standard financial report, but a report created for management purposes.
Of all the rows in the chart, ending cash is the most important. Pay close attention to ending cash and note those months that are projected to be low. Net operating income is the second most important number in the model. (Remember, cash is king!).
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Editor: Rubick L.