Wine Industry Articles
Is Your Winery’s Working Capital Working for You?
2010 Spring Issue of Canadian Grapes to Wine
Although the wine industry did not feel the effects of the economic downturn as deeply as other industries, many wine businesses saw a decrease in sales. While people still consume the same amount of wine, there has been a shift to lower cost wines, many International. Although there have been signs of recent economic improvement, many winery owners are still nervous about the state of the economy. Identifying ways to balance and strengthen your working capital will help reduce anxiety and ensure the health of your business.
The less working capital available, the more a company needs to rely on short-term borrowing, increasing the cost of doing business. At the same time, lenders are tightening their qualifying criteria, affecting the availability and affordability of working capital loans and accounts receivable financing. The suggestions below will help your business maintain balance and strengthen its working capital position.
Start with benchmarks. Determine your net working capital ratio to assess how much working capital you have in relation to assets. Also determine your net liquidity ratio which takes into account the amount of credit available to your business. The quality and turnover of inventory and accounts payable are also important influences on working capital. Use your inventory turnover ratio to monitor any changes in how frequently your business is moving grapes and wine. As well, calculate and compare the average age of payables to monitor the balance of cash outflows. Review these ratios on a monthly basis to help you understand the ups and downs of your seasonal cash flow needs.
Establish a working capital contingency fund to ensure your winery is not caught short of cash. With extreme seasonality cycles in the wine industry, production costs will be high during harvest in the fall while sales will be high during the peak tourism months in the spring and summer. Consider depositing funds during high sales months into an interest-bearing account or securing an overdraft option with your financial institution to provide working capital during high production cost months.
Look for opportunities to build and safeguard your working capital. Increasing sales, for example, will increase net profit. There may be sales opportunities that you haven’t yet acted on, like agri-tourism. You may also be able to improve sales procedures by assessing your distribution channels or marketing initiatives.
Eliminate unprofitable services/products to enhance profits. This could free company resources or time to focus on more profitable sources of revenue. Agri-tourism initiatives, like a guest house or restaurant, may not make sense for every winery.
Reduce expenses to increase profits. Monitor costs/sales, and consider what expenses you can reduce or eliminate without negatively impacting sales or operations. Look at both fixed and variable expenses with the view that every dollar you can reduce in unnecessary expenses is a dollar you can put to productive work in the business.
Look at your winery’s assets and ask if each asset is generating a return on your investment? Leasing certain assets can strengthen your working capital position. For example, if you own buildings or equipment, it may be possible to sell and lease back. If cash generated by these transactions is used to improve or expand your business, you can build profitability and cash flow for the long term.
Review your sources and forms of capital to ensure they are well suited to your type of business, your goals and needs. Review the terms and conditions of current lending agreements, and never assume that you will be able to renew existing arrangements when they come due. Your debt/equity ratio should ideally be about 1:1. If your ratio is rising, take preventative action to restructure debt to increase working capital. Values of Okanagan vineyard properties have skyrocketed which provides opportunities to renegotiate collateral or a reduction in interest or personal guarantees. Alternatively, if you are renegotiating loans, request 10-20% more than you need and a repayment period that is also longer than needed as a “buffer” against unforeseen expenses or sales downturns. Stay close to your lenders; keep them informed about the strategies you are implementing to address today’s economic challenges. The more aware and involved they are, the more likely they will be to support your business.
It’s important to be aware of changing market conditions and to implement strategies to safeguard working capital. When the economy turns around – and it will – your winery business will be ready to act on emerging opportunities.
BDO’s Wine Services Team may be reached at 250-763-6700 or 1-800-928-3307, or by email at: wineries@bdo.ca. www.bdo.ca/wineries
