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right thanks everyone for joining today Jeremy and I are really excited to be working with the organ wine board to put together these sessions for you today we're gonna be going over the accounting 201 session I really hope you find it helpful to give you a little background my name is Casey Johnson I'm a cost accounting specialist crafted ERP is for my career working in a lot of operational accounting going over inventory management building out your cost structure and really understanding what your profit margins on are jeremy king is not able to join us today he is a principal with crafted erp ian is currently travelling to the unified wine symposium but he started his career in investment banking eventually becoming the CFO of a publicly traded software company after leaving corporate finance cbn to work for technology and management consulting practice it was well there that he had the idea for crafted ERP to give you a little background on what crafted ERP is it's an industry solution built on NetSuite to help businesses in the beverage industry manage their inventory and accurately report financials so we're really excited to help work with Oregon wine board to go over costing and really help you understand how we're gonna build these costs and understand the profitability of your vineyards so to go over the agenda for today I know last time we covered a lot of that ebody and the balance sheet income statement information that brie mentioned on so today what we're gonna be going over is developing a costing model how are gonna be abble hanging overhead costs to this costing module really looking at aging costs finding ways to identify major cost drivers and if there's any potential for savings we're also gonna be reviewing your profitability so we really want to understand how profitable your vineyard is and if there's any room for savings so as we go over this costing model progression and then costing 101 webinar if you were able to join we've really honed in on what are the material costs that are making up the final case product our final case Goods wine costs so we really focused on columns 3 & 4 to say what our vineyard materials how much is our fruit costing us any a sort of winemaking materials or cellar materials those packaging materials and building on that to get into our case good inventory so as we progress through this we're gonna be working backwards into these 1 & 2 columns today gathering a lot of those labor costs how are we going to capture our vineyard labor and then how are we gonna assign that to a specific varietal so that we know the true cost of what that final case of wine costs us again looking at overhead so outside of Labor what other costs is it taking in order to manage the vineyard maintain the vineyard and really produce the best grapes that we can now if we're purchasing fruit we're going to be looking at additional costs that we might want to add to that purchase fruit so we'll be looking at our landed costs is there any associated with acquiring this inventory are there any other costs handling of the goods that we need to consider to really capture the total value of that grape inventory next we'll go into the winemaking so looking at those press factors any labor associated there to really get down to that new bulk wine cost before we go through the aging process and the storage of the seller the seller labor any materials added their overhead first facilities of the storage and then looking at that blended wine final cost where again we're going to have another factor of the evaporation so as a good process really wouldn't make sure you know we're capturing all the value of these things but then we're also capturing that natural natural loss in the quantity of materials that we have on-hand and so then we'll get into the final portion where we go into that packaging so we have our blended bulk wine how do we get this into the bottle out to our customers what is that final cost to our customer and really understanding the profitability of that so to go and look at it in more of a numbers aspect we're gonna stop at the start at the top of gathering that total grape cost whether they're purchased or whether they were harvesting them ourselves and we're having to add in that labor and overhead to get to the total value of what that grape varietal cost us then when we get to that press factor one of the main things we want to make sure is that while we know we're gonna reduce the total weight or volume of a product that we now have on hand we want to keep the value the same so for example if we have if you end up with if you start with a thousand tons of wine and the thousand tons of wine costs you X amount of dollars we want to make sure that after that press factor is considered and you have less tons you still have the same value in your inventory and your financials and we're gonna go through the same process once we get past that press factor of adding any additional materials past that step labor associated with it and overhead to get the total cost of our aged wine at what point we want to consider that evaporation factor so o if we go back to that previous example if we have a thousand gallons of wine on hand and in those thousand gallons cost us three thousand dollars we might say we expected two percent evaporation factor to be considered here so we might lose twenty gallons of wine through evaporation that we know is a natural process and so while we no longer have those twenty gallons that nine hundred and eighty gowns that we still have on hand is going to remain at that three thousand dollar value so we want to make sure that we're capturing and holding on to that value as we go through this process to really understand our cost of goods after that step we're gonna look into our packaging materials labor and any overhead associated with packaging to get our final total cost of that wine production so if you are a part of the costing 101 webinar you already saw this slide this is where we just start gathering those material costs and everything we need to consider so I'm going to look at our grape varietals and how much money does specific Bridal cost us whether we harvested it or purchased it then going into the next step of that we're looking at bulk wine if we purchased in those grapes are harvested those grapes ourselves considering that pressing factor to get to our new quantity on hand and value if we're purchasing any bulk wine in to blend or whatever the status is without what the true value of that is adding any landed costs and then we also want to be looking at our packaging materials so capturing what are we purchasing our bottles for corks cases labels and just really building on those material costs so once we have all of those materials the next area that we want to start looking at and bucketing these into our our landed costs our labor and our overhead so when we bring up landed costs what we're talking about is anything that it costs you in acquiring that inventory so if you are purchasing in grapes you want to consider are you being charged Freight separately for that purchase are you transporting them yourselves or is that Freight cost included in the price that you're purchasing them for if that Freight is a separate line item on the invoice you want to make sure that you include that in the total value of your grapes along with any sort of duties in fees so if you're importing if there's any sort of duties and fees associated with your bottles with your cases with the grapes themselves you want to make sure that we're applying this to the total value of our inventory to get the true cost of goods and so landed costs will not only be on the purchase side but it will be on any sort of transfer that you have so if you are harvesting the grapes yourself and you need to transfer that inventory to a separate location in order for the pressing process to occur we want to make sure that when we do that transfer we add in those additional freight costs or if you have those trucks in your inventory the labor that you might be paying the driver in order to move that product from run location to another the next area that we want to look at is labor so we want to be capturing capturing what our total labor is if or harvesting the grapes ourselves we want to be capturing what is our vineyard labor how much labor are we spending from the time I'm the beginning of season to the end of the season to maintain this vineyard and then again once we get into that aging process the pressing process is I'm going to be capturing the labor along the way so that we can make sure that we're still building that into our cost at each stage of the process then the third area that we're gonna look into is our overhead so if you're looking at harvesting the grapes is there any sort of fertile fertilizer or anything that you're using in your vineyard that you want to capture the cost of that that's needed in order for that grape production to happen then when we get into the storage facilities are you renting a building if you're renting that building we want to make sure that we're capturing that as part of the storage cost if you own the building you might potentially have some insurance that you're paying on this building or other costs associated with the maintenance of this building then we'll want to make sure that we're including in this cost because this is a direct cost related to having this storage facility for this inventory that you're producing along with that you're going to have your utilities of the building building those in and you sort of maintenance with your equipment and get that maintenance is a required feature process in order to get the grapes from point A into the bottle point B so that you can have this building cost along the way storage is another area that we see big and overhead especially if you're using third-party storage facilities for potentially your case wine or if you have any barrel aging so just making sure that we are able to gather and capture all of those costs so now when we start looking into allocating the overhead of these costs we're gonna start at the excuse me we're gonna start at the vineyard level so for this example we're using our labor expense so if it takes $15,000 over a period of time - if it costs sixteen fifteen thousand dollars over a period of time in labor in order to maintain our one second our vineyard we want to make sure that we're applying that cost correctly so that we can get that down to the varietal level that we discussed at the beginning and we're looking at our material cost and the main way that we see this done is based on planted acreage of your blocks so we see these costs allocated down to the block level to capture which varietals this applies to so for this example if we're looking at planted acreage and block a has 2.1 planted acres we're assuming that the labor that is required to maintain that block is 39 percent of the total labor based on the total planted acreage of 5.44 this vineyard so 39 percent of that 15,000 dollars is going to be just over fifty eight hundred dollars in labor in order to maintain block a so how do you capture this is a big question that is next how do you gather this information so there's a few ways to do it the main way that we see this done is with a custom general ledger segment and this is going to depend on how advanced your financial systems are and whether that's allowed so when I say a custom general ledger segment a lot of times when you're looking at general Ledger's say segments for example Department is a very popular segment that people use so if you look at departments it's usually defining expense categories so your accounting department your administrative department your IT department so what companies will do is they'll have one general ledger account for payroll expense and then they'll have a separate segment that defines that out to departments so what we do here is we have a single labor expense category that is related to our agricultural labor of that vineyard and then at the end of each month each quarter each period we do an allocation to push that down to the block level so that at the end of harvest you can pull up that general ledger segment an account and say much did we spend in labor how much did we spend in maintenance how much did we spend and any other activities in order to maintain this block and we usually use planted acreage as a good indicator of how much effort it is to maintain that block as an estimate trying to gather this information very specifically down to the block level would be very difficult but when we're using that planted acreage you tend to get a larger harvest out of there it spreads out that value more evenly in a more reasonable fashion across the acres so what do you do if you don't have that general laughter say man that specialized segment for walk how else can you capture this information so there's a few ways that I've seen this done a few companies will break this down into specific general ledger accounts so instead of having for this example one labor expense account you would have three labor expense block a block B Block C and it kind of just depends on how much workload and how much capacity your team has in order to be able to do these things because sometimes maintaining a general ledger or what that many accounts can get very difficult because usually it's not just three blocks that you're managing on your vineyard it's usually 20 30 40 or however many that could be so breaking it out at that level can be difficult you can also just keep it grouped into that one expense account and do this manually out in Excel so at the end of the harvest you go through and say what was our total planted acres this year well as I told a labor expense and just start building out those categories and groups to then say okay hey how much of this blocks varietal was put into the finished goods cost of wine and so how much of this portion do I need to attribute to that value in each case of wine so once we gather all of that as costs associated with our farming we can get a real cost of what our grape what it costs us to harvest that grape that specific varietal and that's so important because then it tells you how effectively your vineyard and your farming operation is working and it's very good afterwards once you've gathered all the gathered all that cost to go to the market and say what would it have cost me two o'clock are these same grapes these like a very similar quality of grape same varietal what would it have cost me if I had tried to purchase these and then I'll give you a good indication of how effectively your farming operation is working obviously if it's costing you significantly more you could go out into the market and purchase a similar quality variety it'll it's now time to start diving deeper into those costs to say I did it cost me so much to produce in this block what specific drivers were there was you know at a difficult season for me in terms of whether I had to use a little more labour what what is causing it to be higher if you're going out and you're saying gosh it's gonna cost me a ton more if I wanted to purchase these out in the market your farming operation your vineyard is doing great keep it up but it's always important to give you sort of that benchmark of how you're doing that way you can always constantly be looking for ways to improve so once we've gotten through that gathering of our grape costs our estimation of our price factor we're really gonna want to start looking at those aging costs so we know once we have the wine pressed if we're not just bottling it and sending it out to the customer or you have it's in storage whether that's barrels or tanks it's still gonna need to be maintained so understanding what is the total labour over the period that it's in storage over the period that it's being aged any sort of maintenance involved and if you're using tanks there's usually gonna be regular maintenance involved in making sure everything is sanitary you're good to go and then also the storage costs so if you're using a third party storage facility or even if you're using your own storage facility wha
insurance are you paying on the building what are the utilities to get that climate control in place that you might be using to make sure that your wine is aging at the best possible in the best possible conditions and then we also want to be considerating considering that evaporation factor so we know there's going to be some loss during this aging process but how do we capture how much loss are actually was and how do we make sure that we keep the value of the wine the same so we want to make sure as we're going in and potentially transferring barrels and to others to consider that evaporation factor that we're consuming that quantity into the wine and consuming that value but our output it's going to be less for each time we have that evaporation factor that we're considering so now to get to cost drivers and savings so one of the major areas that we look for and we're talking about cost drivers and savings is Freight so anytime we're touching or moving inventory there's always gonna be a cost associated with it and I put transfer loss afterwards because that's also a potential area where we could lose some of that value in our inventory that we can look to maintain in the future so if we're looking at Freight looking at what it's costing to acquire grapes if you're acquiring them if you're transferring any sort of inventory from one location to another how many touches are you having on this inventory is there a potential room to streamline your supply chain really capturing that overall free expense right now the trucking industry is in a shortage of drivers which is driving up freight costs and so the demand is there the supply is very low so this is one area where it's very good to understand what the costs of your Freight are and if there's any room for improvement if you need all of these touches if you need all of these movements are you using the most cost effective and reliable carriers could you potentially look at bringing some of this in-house also are you planning far enough in advance you're not getting any sort of additional fees for short notice of getting these transfers in place it's just a great place to be able to dive in and get the details on what it's actually costing you to move this inventory transfer loss is another place so again if you're anytime we're moving product there's a chance that we're gonna lose some of them if you're coming out of a tank and into a truck chances are you're not going to get as much out of the tank and into the truck and then back out of the truck as you started with so just making sure that every time we're removing product it's a necessary and intentional move you know is there value in transferring the grapes to be pressed at another location is the cost-effectiveness of doing that worth it over are you pressing the grapes yourself should you be looking into other factors and being able to do that the next area is labor cost so your labor cost arrow is going to be a significant portion of your cost of goods so we all want to play our employees well you know make sure that they're happy they're well deserving they're hard workers so it's not so much how we can cut costs in labor but making sure at the very least we understand why we're having these labor costs if your labor costs year over year are continuing to increase while your revenue stays stagnant you need to understand you know why that's happening how you can then capitalize on that labor cost to increase your revenue instead of having that cut into your margins understanding you know if it's a down year do you potentially need to look at adjusting your labor force and you know saving some money they're just really understanding what your labor costs are if they're necessary if they're adding that value to your wine and then maintenance is gonna have a similar sort of story if your maintenance is increasing if your maintenance expenses are increasing and your revenue is staying the same is it to me look into new equipment are you having all of these maintenance issues because you have some aged tanks you need to redo the trellis or irrigation system that's potentially costing you more money in the short term and you could be investing in new equipment that will help you along the way so while you might incur that big expense or that big cash out in order to update your equipment along the lines is there your return on the investment in this equipment going to be valuable because that's really where you need to make sure that anything you're investing in is gonna give you that ROI it's gonna help cut on your maintenance costs in the future all right so how does this all play together so we want to make sure that as we're gathering all of these costs getting the true case cost of our wine that at the end of the day each varietal each blend each finish line its profitable and as we dive in and start of allocating these costs down to the block level capturing our labor along the way you know looking at you know how much of a planted acreage one varietal is and abusing the costs based on that we can get down to a more accurate case good cost of our wine and for that example we looked at earlier between a B and C they all had a different planted acreage so if I apply the same amount of labor costs to each of those blocks it's gonna be unfair to the to the block that has the lower acreage which because they probably didn't incur that much labor so when you look at finished goods case you might say wow I'm not making any money on this finish good but in actuality it could be your most profitable line and one of your other wines that you're not applying a laborer cost to fairly enough could potentially be dragging you down and holding back those margins and it's better to dig into that sooner so one of the first things we want to make sure we're doing is we want to make sure that we're setting goals when we're looking at our varietals in our cases is you know what do we want our profit margins to be as a whole at the end of the day also are there different profit margins between different types of wine and how can I compare that to what I'm selling my wine for and what my profit margins are so as we're setting these sort of profit margin goals it's important to be able to estimate what the total cost of our wine is I know especially if you're harvesting the grapes yourself sometimes those costs don't come in in real time so you'll get invoices for third party later a few months labor a few months after that occurs so really making sure that you know we have a good estimate for what we think it's going to cost us to produce and then as that information comes in we're able to adjust our estimate based on actuals so estimating out that material cost getting that press factor in there to see what our total final quantity is with our new value adding in that labor and overhead making sure we understand those evaporation rates to understand the total quantity that we'll have remaining to get to that calculated estimated cost per case then as we have those materials come in say your harvest wasn't as plentiful as you thought you want to purchase grapes in order to make for this not adjusting that and understanding the impacts you know was this a good decision is this gonna be valuable and based on the industry and the demand currently should you be purchasing in grapes or should you potentially just take that harvest that you have getting that cross Factor adjusting your labor rates no one can predict the weather there's a lot of it things that will impact your labor and your overhead costs throughout this season so while these estimates are probably gonna be well not probably your estimates are not gonna be accurate but we want to get as close as possible I'm gonna make sure that as we make these adjustments were able to say you know here's what impacted it this year here's what impacted this season so we can start building those trends and hopefully get a better estimate year over a year and then after we get done with getting that actual marge actual cost of our wine per case you know you can't price per case less our actual cost per case divide it by that price per case to get our margin to say you know did we meet our goals was it as expected a lot of times what we see as we start diving into this and the allocating these costs down to the block level really diving in and getting a better estimate of why don't--why cost us there's a lot of surprises that come out of this you know sometimes they're good sometimes they're great overall you're looking at your financials and you're profitable but it's really good to know based on those specific wines that you're selling which ones are really your good moneymakers and which ones potentially you have room for improvement on or potentially you need to look at reworking depending on what your end goals are you might have some wines that you're trying to mass distribute that you might be expecting a lower profit margin on so just being able to see whether that's true or not well you have some that are gonna be you know smaller batches select vintage that you're gonna expect higher margins and making sure that you know those smaller batch wines are going to be as profitable as you expect in order to get it's really the return on all of that effort you're putting it but it's like to open it up to questions I put my email address on the bottom along with Jeremy King and then our LinkedIn is there also so I'd love to connect with you all and Linkedin Bree do we have any questions thanks Casey that was fantastic modeling and we don't have any direct questions except where can we find the recaps and these recaps will be posted on the industry Oregon wind rrg site along with the profit planner and the links to the profit planner we should have this webinar up hopefully by the end of today if not within 24 hours so please look for the 101 and 201 series there and again register for the 301 session which is coming up at symposium next Wednesday at 3 p.m. and we might see if we can also convince Casey to do a recap of the 301 session later in the month Casey there's a question are you placing cost of label design in overhead yes so that the label design I would put that into almost a landed cost of your label I guess let me take a step back and make sure that I'm answering this fully so your label design depending on how many years you're using that over might be easier to just expense if this is the one year to year label that you know how long you're going to be using that specific label and design for you can either apply it to that specific wine that you're using for again depending on the expense that it is you can capitalize that into inventory and recognize it over a specific period so it's kind of a difficult question just depending on you know if you're planning to use this label for 10 years you can apply it to that wine cost over 10 years and at any point in time if you wanted to change you just have to expense and write off that amount at the moment a lot of those questions sometimes depend on the value of what that design costs you and then it might be good to discuss it with a tax accountant too as far as when and where it's recognized that expense I would agree with that thanks Casey another question was how are you handling cost of case storage over time when a vintage has been released so the way that we handle that and aren't in the system that we're using is we capitalize that storage based on what you still have on hand so just understanding that that's still part of the cost of having that wine available especially depending on what your sales team is planning to sell I think it's important for them to understand what those storage costs are in order for it to sit on your books the way we're able to do that is we just run basically a self consumption production order at the end of each month to add additional costs that inventory that's still sitting on hand great I think that's all of the questions that have come through again Casey can be reached at Casey at crafted ERP dot-com if anyone has any further questions and she and Jeremy will also be at the Oregon wine symposium next Wednesday afternoon with the 301 seminar thank you again to everyone for joining us today and we look forward to seeing Casey and the crafted team at the symposium and again the reviews of these webinars will be available on the oregon wine industry website linked to the profit plan a calculator thanks and we'll see you next week at symposium
