2017 Annual TWGAA Conference Top 10 financial planning mistakes Presented by: Amanda Sims, Associate, Silicon Valley Bank
# 10 Improper sourcing strategies 2015 Annual Wine Conditions Survey 21 February 2017 2
Sourcing Characteristics $/Ton vs $/Acre Contracts Variety Short term vs Long term contracts Region Grower 2015 Annual Wine Conditions Survey 21 February 2017 3
Texas Viognier $1,300 $2,000 Virginia Viognier $1,800 $3,000 New York Riesling $1,200 $1,750 Oregon Pinot Gris $918 $2,667 Washington Riesling Average = $760 Central Valley Chardonnay $150 $625 Sonoma Chardonnay $700 $11,012 Napa Chardonnay $525 $7,500 Texas- Pate, Hellman, Johnson. Texas Vineyard Budgets Virginia- Virginia Wine Marketing Office. 2015 Commercial Grape Report. 2015 New York- Finger Lakes Grape Program. 2015 Finger Lakes Grape Price Survey Oregon- Southern Oregon University Research Center. Preliminary Grape Prices. 2016 Washington- Washington State Wine Commission. Annual Grape Crush Report. 2015 California- California Department of Food and Agriculture. Grape Crush Report Final 2015. 2016 2015 Annual Wine Conditions Survey 21 February 2017 4
Keep your sourcing strategy aligned Quality Price Point Input costs 2015 Annual Wine Conditions Survey 21 February 2017 5
# 10 Improper sourcing strategies - Diversify for emergencies - Match costs/ unit to bottle price 2015 Annual Wine Conditions Survey 21 February 2017 6
# 9 Ownership bleeds company 2015 Annual Wine Conditions Survey 21 February 2017 7
Debt Service Coverage (net income + interest + depreciation + amortization) DSC= EBIDA - Distributions Interest + Loan Payments Cash Flow: Debt Payments should be > 1.25x 2015 Annual Wine Conditions Survey 21 February 2017 8
When distributions hurt 3/31/2017 12/31/2016 3/31/2017 3 12 3 TTM Net Income $ 50.0 $ 150.0 $ 30.0 $ 130.0 Interest Expense $ 15.0 $ 60.0 $ 15.0 $ 60.0 Depreciation & Amortization $ 10.0 $ 50.0 $ 10.0 $ 50.0 (Distributions) $ (100.0) $ (100.0) EBIDA $ 75.0 $ 160.0 $ 55.0 $ 140.0 Principal $ 25.0 $ 100.0 $ 25.0 $ 100.0 Interest $ 15.0 $ 60.0 $ 15.0 $ 60.0 Debt Service $ 40.0 $ 160.0 $ 40.0 $ 160.0 DSC 1.88 1.00 1.38 0.88 2015 Annual Wine Conditions Survey 21 February 2017 9
# 9 Ownership bleeds company - Think of cash flow needs for the next year if taking a distribution - Take a salary that can be ratcheted up or down 2015 Annual Wine Conditions Survey 21 February 2017 10
# 8 Underinvestment in bookkeeper 2015 Annual Wine Conditions Survey 21 February 2017 11
Wine Bookkeeper Qualifications Quarterly Depreciation Expense Wine Cost Accounting (Many inputs over long period of time) Capital Expenditures (acquisition expenses for equipment) 2015 2015 Annual Unified Wine Conditions Wine Symposium Survey 21 February 2017 12
# 8 Underinvestment in bookkeeper - You are stretched thin, delegate to a professional - You need this information to be accurate and timely 2015 Annual Wine Conditions Survey 21 February 2017 13
# 7 Poor wine quality 2015 2015 Annual Unified Wine Conditions Wine Symposium Survey 21 February 2017 14
Value = Price Quality 2015 Annual Wine Conditions Survey 21 February 2017 15
Value = Price + Experience Quality 2015 Annual Wine Conditions Survey 21 February 2017 16
Good Value Bad Value Good Times Bad Times 2015 Annual Wine Conditions Survey 21 February 2017 17
# 7 Poor wine quality - Invest in training and rewarding your sales staff - Bad wine is unlikely to be sold during a recession 2015 Annual Wine Conditions Survey 21 February 2017 18
# 6 Ignorance of approaching capital expenditures 2015 2015 Annual Unified Wine Conditions Wine Symposium Survey 21 February 2017 19
Valuing your inventory Wholesale case price = $300 Bank advance rate = 50% Bank s case value = $150 (1-GM%) x (case price) = cost/ case ie (1-45%) x (300) = $165 Bank s case value = 90.9% of your cost 2015 Annual Wine Conditions Survey 21 February 2017 20
Annual Expenses for Wine Production LoC LoC LoC LoC Jan Mar white wine release Jun bottling Sep buy grapes Dec red wine release LoC LoC LoC Jan Mar Jun Sep Dec pest management/ labor expenses harvest expense sell grapes Source: 2015 Annual Wine Conditions Survey 21 February 2017 21
Matching sources and uses of financing Use: Funds make wine Line of Credit Collateral: wine inventory Use: Funds buy assets or make improvements Term Debt Collateral: purchased or improved asset 2015 2015 Annual Unified Wine Conditions Wine Symposium Survey 21 February 2017 22
# 6 Ignorance of approaching CAPEX - Finance annually recurring expenses with short term debt and long term investments with term debt - Monitor depreciation to plan for new equipment costs 2015 Annual Wine Conditions Survey 21 February 2017 23
# 5 Undercapitalization 2015 2015 Annual Unified Wine Conditions Wine Symposium Survey 21 February 2017 24
Debt and Equity are friends Source: 2015 Annual Wine Conditions Survey 21 February 2017 25
Accounting Principle: A = L + E Asset Liability Equity Inventory $3,000,000 Equipment $300,000 Intangible $15,000 Line of Credit $2,000,000 Term Loan $120,000 Retained Earnings $600,000 Capital Contributed $595,000 2015 Annual Wine Conditions Survey 21 February 2017 26
Choose your sliding scale Plan B Plan C Plan D Plan M Plan N Plan Z 5% of equity No voting rights 5% of equity Management role 5% of equity Voting rights 25% of equity No voting rights 25% of equity Voting rights 100% of equity Voting rights 2015 Annual Wine Conditions Survey 21 February 2017 27
# 5 Undercapitalization - Aim for < 3:1 Debt: Equity ratio - Finding an investor does not mean giving up control 2015 Annual Wine Conditions Survey 21 February 2017 28
# 4 Underinvestment in software 2015 2015 Annual Unified Wine Conditions Wine Symposium Survey 21 February 2017 29
Customer Relationship Management (CRM) List of customers and contact info Sales history Shipping address Shipment details Length of membership Available inventory for sale 2015 2015 Annual Unified Wine Conditions Wine Symposium Survey 21 February 2017 30
Measuring depletion Cased Goods as of: % of # Starting Release Yr. % Release Vintage Varietal of cases Volume Elapsed Depleted Date 2015 Caberent Sauvignon 4,000 6,000 10% 33% Nov-16 2015 Zinfandel 5,000 5,500 2% 9% Dec-16 2015 Tempranillo 400 1,300 35% 69% Aug-16 2015 Merlot 2,000 4,000 21% 50% Oct-16 2015 Chardonnay 1,500 2,600 46% 42% Jul-16 2014 Red Wine 1,000 8,000 34% 88% Aug-16 2015 Annual Wine Conditions Survey 21 February 2017 31
Discount vs Special Release 2015 Annual Wine Conditions Survey 21 February 2017 32
# 4 Underinvestment in software - Give customers a customized experience - Track your inventory s sales trajectory 2015 Annual Wine Conditions Survey 21 February 2017 33
# 3 Distribution is easy money 2015 2015 Annual Unified Wine Conditions Wine Symposium Survey 21 February 2017 34
Pros Cons Brand exposure Confirmation of quality Restrictive pricing Keep distributor interested Locked in partnership Loss of brand control 2015 2015 Annual Unified Wine Conditions Wine Symposium Survey 21 February 2017 35
Wine Shelf Wine Club Flagship Red Flagship White Two price points Limited Releases Library Wines Unusual varieties Unusual packaging 2015 2015 Annual Unified Wine Conditions Wine Symposium Survey 21 February 2017 36
# 3 Distribution is easy money - Research distribution laws and partner options - Offer your wine club something special - Keep your higher margined tasting room stocked first 2015 Annual Wine Conditions Survey 21 February 2017 37
# 2 Producing too many SKUs 2015 2015 Annual Unified Wine Conditions Wine Symposium Survey 21 February 2017 38
Which do people actually like? 2015 2015 Annual Unified Wine Conditions Wine Symposium Survey 21 February 2017 39
People are all unique snowflakes 2015 2015 Annual Unified Wine Conditions Wine Symposium Survey 21 February 2017 40
Wines profits are black and 2014 Viognier 2014 Cabernet Sauvignon # of cases 500 # of cases 500 price $ 350 price $ 500 Revenue $ 175,000 Revenue $ 250,000 grape $ 22,000 grape $ 28,000 yeast $ 2,500 yeast $ 2,500 nutrition $ 100 nutrition $ 100 lab supplies $ 1,500 lab supplies $ 1,500 filter pads $ 50 filter pads $ 50 bottle $ 7,500 bottle $ 8,000 cork $ 1,000 cork $ 1,000 label $ 1,000 label $ 3,000 labor $ 8,000 labor $ 8,000 depreciation $ 10,000 depreciation $ 16,000 COGS $ 53,650 COGS $ 68,150 Gross Margin 69% Gross Margin 73% 2015 2015 Annual Unified Wine Conditions Wine Symposium Survey 21 February 2017 41
# 2 Producing too many SKUs - Produce wines people are buying - Understand the gross margin of each SKU and which are dragging profits down 2015 Annual Wine Conditions Survey 21 February 2017 42
# 1 Imbalance of case production and case sales 2015 2015 Annual Unified Wine Conditions Wine Symposium Survey 21 February 2017 43
Production : Sales 1:1 Acceptable Reasons Growing production Small vintage Longer aging SKUs Unacceptable Reasons Sluggish sales Swimming in an ocean of wine Wrong kind of liquidity 2015 2015 Annual Unified Wine Conditions Wine Symposium Survey 21 February 2017 44
Ways to slow production Sell estate fruit Cancel short term contracts in advance Sell excess wine instead of bottling Explore alternative sales channels 2015 2015 Annual Unified Wine Conditions Wine Symposium Survey 21 February 2017 45
# 1 Imbalance of Case Production and Case Sales - Sell what you produce - Don t produce what you can t sell - Slow production if you have slow sales 2015 2015 Annual Unified Wine Conditions Wine Symposium Survey 21 February 2017 46
#10 Improper sourcing strategy #9 Ownership bleeds company #8 Underinvestment in bookkeeper #7 Poor wine quality #6 Ignorance of Approaching CAPEX #5 Undercapitalization #4 Underinvestment in software #3 Distribution is easy money #2 Producing too many SKUs #1 Imbalance of case production to case sales 2015 2015 Annual Unified Wine Conditions Wine Symposium Survey 21 February 2017 47
2017 Annual TWGAA Conference Top 10 Financial Planning Mistakes Amanda Sims, Associate, Silicon Valley Bank asims@svb.com 707-535-5078