fund a large mortgage from earnings. A typical projected balance sheet shows a substantial cash deficit at year-end for at least the first two or three years, and then indicates a need for major refinancing in the third or fourth year, even with a winery that makes a spectacular market entry and has strong sales. The extra financing is typically required for expanded inventory. Part of your financial model must include large and increasing capital for grape purchases or production that won’t be sold until two years later.
Every startup financial model requires assumptions. These should be listed carefully and reviewed regularly. If you violate them, revise the assumptions and the spreadsheet and see what happens to your financial model. It may be discouraging, but it can save you from the unexpected crisis of running out of cash with no alternative options. If you see it coming, you might be able to take evasive action. Transforming a series of assumptions into pages of
spreadsheet formulas can be difficult. The approach I’ve used many times is to start with a page that lists all capital equipment, including property. Depreciable items are listed separately from property, and items are grouped according to their standard rates of depreciation. Consumable items and labour are listed on separate cash flow pages. Columns are created for (say) five years and cash expenses for all capital purchases are listed for the years in which each is expected to occur.
These items can be combined with annual operating expenses to create a series of projected balance sheets. A balance sheet is a snap-shot to show the financial health of the company at the end of each year of operation. Operating costs are generally of two kinds, those which vary (such as packaging) with production volume and those (such as property taxes) which are a constant annual cost. With these assumptions you can create cash flow estimates for separate operations such as vineyard, winery, and sales/administration. If you substitute depreciation
allowance for capital costs, you can generate a profit/loss statement from cash flow.
It’s also a good idea to examine the month-by-month cycle of operations, because income and expenses vary dramatically throughout the year. These figures can be generated by taking month-by-month percentages of the cash flow estimates. Banks often require a series of operating ratios, which can be generated and revised automatically from spread sheet values. Another
useful series of ratios is the ratio that transforms each item or total into a cost per bottle, cost per litre or cost per case.
This enables you to visualize which
cost items will have the greatest impact when you try to make your operation more efficient. Do some up-front planning and you can successfully develop your dream instead of experiencing a nightmare.
— Gary Strachan can be reached at
gestrachan@alum.mit.edu.
BC Wine Grape Council
Conference & Trade Show
Monday, July 18 & Tuesday, July 19, 2011 Penticton Trade Show & Convention Centre
The Annual Enology & Viticulture Conference & Tradeshow is a premier wine industry event which brings hundreds of wine and grape industry professionals together to discover new products and services, to learn about the latest technologies and research, as well as to network.
Highlights
Impact of Early Leaf Removal on Cluster Morphology and Grape Composition Dr. Stefano Poni, Istituto di Frutti-Viticoltura, Università Cattolica del Sacro Cuore, Piacenza Italy
The Ins and Outs of Grapevine Leafroll Disease - Dr. Naidu Rayapati, Washington State University, Prosser, WA
Biological Control of Pests: an Ecological Service Provided by - Miguel Altieri, University of California, Berkeley, CA
Atypical Aging - Dr. Denis Dubourdieu, Château Reynon, France
Sparkling Wine - Dr. Gérard Liger-Bélair, Université de Reims Champagne-Ardenne, France
Tannin Management in Red Wines at Château St. Michelle and Canoe Ridge - Joshua Maloney, Château Ste Michelle & Canoe Ridge, Woodinville, WA
The tradeshow with over 108 exhibitors provides a unique opportunity for you to meet with them. Take advantage of this exclusive tradeshow to make the right contacts with a highly targeted group.
Sponsored by
For more information contact BC Wine Grape Council, Tel: (250) 767-2534 E-mail:
BCWGC@telus.net or visit:
www.bcwgc.org
British Columbia FRUIT GROWER • Summer 2011 29
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