The wine business is one of the most vertically integrated businesses there is. A vineyard can work down the supply chain by building a winery. It can even go further and establish an ecommerce storefront!
This integration may come with reduced cost and higher profit margins, but it also comes with complexity, particularly in accounting. Having three businesses means having three separate accounting systems. Sounds daunting? Let Unloop show accounting for vineyards and wineries to you as simply as we can.
At the top of the wine industry supply chain is the vineyard. This business takes care of grapefruit planting up to harvesting, which wineries will use as a raw material for making wine. The following is the vineyard's production process.
Farmers plant rows of grapes on a vast land using machinery and direct labour, which takes days to finish depending on the vineyard's land area and available labour.
From the time when farmers plant the grapes, there's a period of dormancy that takes years. During these times, activity is focused mainly on pruning the growing branches to ensure high-quality grape yields.
Veraison is the peak period of growth for grapes. A time when the grapes are ripe and ready for picking.
Manual laborers select grapes and clip them off the branches. This is the final step in a vineyard's lifecycle. During this time the grapes are shipped to a winemaker or made into wine in-house.
Accounting System for a Vineyard
A vineyard is heavy on agricultural activities. So the production is long-winding and it will take years before the vineyard realizes a profit. Given the situation, accountants follow these practices.
Cash Accounting method
Accountants and bookkeepers use the cash accounting method, also known as the cash-based method. That's because this method makes it easy to record production costs accurately.
The Cost of Goods Produced (COGP)
According to accounting principles, since a vineyard vertically integrates to a winery, accountants use COGP to allocate vineyard costs associated with growing grapes, such as direct labour, overhead, and other supplies and activities involved in the process. Accounting professionals do this to avoid any miscalculations and confusion between the cost pool of the winery and the vineyard.
Grapes take years to grow. As a result, the vineyard only gets revenue after several years. During that time, farming costs add up without any income to offset them. To resolve this problem, accountants may capitalize the vineyard's expenses so the business realizes a profit according to the total sales in the given period.
Harvesting the grapes is the departure point of the vineyard and the start of the winery production processes. In the winery, the grapes are turned into wine and are stored as collections for sale in the future.
In most cases, vineyards also have a wine production facility (i.e., winery)—that's why the two terms are often confused. But a winery has a separate process.
Crushing and Pressing
The winemaking process starts by pouring the grapes into a crusher to extract the juice and make the must.
After the winemakers extract the grapes to form must, they introduce yeast strains into the must to start the fermentation. In most cases, wine producers also purify the must of any unwanted natural yeast to achieve desired quality.
Clarification and Filtering
From the fermenting tank, the winemakers will filter out any unwanted debris or pomace from the wine. They do this by transferring the liquid to the barrel or filtering using chemical processes.
At this stage, the must becomes wine. If the winemakers want to age the wine for a better taste, they will put it in bulk wine barrels and store it for inventory.
If the wine producers want a quick turnover, they can transfer the wine to a green bottle and sell it in the market. The consumer can opt to bottle-age the wine or consume it after purchase.
Accounting System for a Winery
As briefly shown above, wine production has a different behaviour compared to the vineyard. It has similar functions to a general manufacturing process, with some nuances. As a result, accountants adjust their practices according to the winery's needs.
The Accrual Method of Accounting
Accountants use the accrual basis accounting method for wineries. It's a rational choice because obtaining the raw material for winemaking may not need to be paid immediately due to integration. On the other hand, getting cash from a sale of a barrel or bottles may also take time. To avoid any miscalculations, accountants record transactions once incurred.
The Cost of Goods Sold (COGS)
Wineries use the common COGS system primarily because they have a tangible good that they can sell for a profit.
The Ecommerce Wine Store
At present, many wine sellers take their products online. Ecommerce marketplaces offer a vast network of wine consumers, making it attractive for sellers of all kinds. Below we will discuss two models wine sellers can get into.
Third-Party Wine Retailer Model
A third-party seller can offer a wide variety of wines from different wineries. They are strictly retail. A third-party wine seller must also follow the steps a direct-to-consumer takes to have an ecommerce presence (see next section), but they have two additional core steps they must do to enter the ecommerce market.
Source a Wine Supplier
Sellers search for wineries, wine wholesalers, and distributors to get their products. They buy bulk to get a lower price and sell for a profit.
Create a Brand
To get credibility, third-party wine sellers create a brand that will serve as their identity for doing business. This will help them differentiate themselves from the rest.
Direct-to-Consumer (D2C) Model
Wineries now have the ability to sell their wine bottles directly to consumers using the power of ecommerce. Smaller wineries are often the ones engaging in a D2C. This model offers a high profit margin and makes for a smooth transition, given that they already have the supply and the brand. All wineries have to do are the following.
Set Up an Online Store or Marketplace Seller Account
If they're selling their wine on Amazon, they'll have to register for a seller account and put all the necessary information about their winery. They'll have to wait for the account activation afterward.
Upload Wine Inventory
Once they have an active seller account, the winemakers can start taking photos of their wine inventory and post them online with full descriptions and other helpful content.
Plan for Wine Packaging and Shipment
Wine bottles are fragile, so producers must plan their packaging and shipping to avoid any in-transit mishaps. They also have to check state laws regarding alcohol selling and distribution.
Engage in Digital Marketing and Advertising
Once producers have an online presence and have sorted out their shipping and packaging, the wine producers can start marketing online. They can hire a digital marketer and other online professionals to find customers and turn their bottles and barrels to revenue.
Outsource Your Ecommerce Bookkeeping and Accounting
The challenge of running a winery is that it has two different accounting systems in place—one for the vineyard and another for the winery itself. Plus, taking the business online will be like creating a separate retail business. Therefore, wine producers must establish another accounting system. Here's what wineries can get when they outsource their financial management.
Accounting professionals will record all the ecommerce business financial data using double-entry accounting software, such as QuickBooks. This service will include generating financial statements and other financial reporting documents as needed.
Reporting on Cost of Goods Sold
The ecommerce retail side of the wine business will have separate COGS recordkeeping. Accountants and bookkeepers report this financial data to you or include them in the income statement for your analysis.
The ecommerce business will have to pay different taxes for accounting compliance. The usual ones are sales tax and income tax. Outsourcing your accounting for ecommerce will give you a team of experts who can help your accountant with their tax filing obligations using an accurate record and other data as needed.
Financial Management Can Be a Breeze for Your Ecommerce Wine Business
Whether you own a vineyard or are a third-party seller, outsourcing your bookkeeping and accounting will lift a huge burden off your back.
Ecommerce has a lot of potential to scale. If the demand for wine spikes, it will be more challenging to do your accounting on your own, so leave it to experts and focus on growing your wine business.Book a call with us if you want to discuss how this works, or you can also check out our bookkeeping services now.