Cashflow for Wineries - Growth By Design's views from Michael Ford

Talking to wineries around Australia last year through the WFA’s WineSkills program, I heard the same question often: “What can I do to improve cashflow?”

This year that question is even more critical. Sales and margins are under pressure, customers are taking longer to pay their bills, while suppliers are pushing harder for payment. Many wineries are finding that cashflow is tighter, leaving their bank accounts looking less healthy.
In uncertain times cash is king. But the typical Australian winery is a cash-hungry beast, so tough economic times are felt more sharply in this industry than in many others. The faster and bigger they grow the more cash is required to support that growth. That’s broadly accepted.
The question is how well winemakers understand the simple things they can do to improve their cashflow performance.
Some basic theory: total business cashflow is the sum of three parts:
• Operating cashflow—cash received from customers less cash paid out to suppliers in day to day business operations;
• Investing cashflow—net cashflow from buying and selling equipment, property, other assets and investments; and
• Cashflow from financing—cash inflows from borrowings less cash repaid to lenders.
The three parts work together, but operating cashflow sets the pace. For example a winery that makes $100,000 positive operating cashflow will need to borrow money if it wants to spend more than $100,000 on buying new equipment. The worse the operating cashflow of the winery, the more it must rely on banks and shareholders to provide funding to support the business.

Digging into operating cashflow
There are seven levers that drive operating cashflow:
• Sales volumes—increased competition, market consolidation and shifting exchange rates are all putting pressure on sales volumes. However, there are plenty of wineries still growing volumes;
• Selling price—continually under pressure from much the same factors as sales volumes;
• Gross margin %—gross margin is the only true ‘income’ of a production-based business. Selling large volumes at 20% margin usually makes for tough times financially. The Deloitte Wine Industry Benchmarking Survey suggests that a small winery needs a gross margin of 50% to be financially sustainable. One big challenge for many wineries is getting a clear picture of the real cost of producing each bottle of wine for each varietal for each vintage;
• Business overheads—in tough times the obvious temptation is to slash overheads. But low overheads can come at a high cost. Cut too much and the CEO ends up doing administration work, taking their mind off the valuable work they should be doing. Cutting the marketing budget might save money this year, but lead to declining sales in later years;
• Debtor collection days—in tough times customers tend to take longer to pay their bills. However, every $1 your customer owes you is $1 you’ve lent to them at 0% interest;
• Inventory days—looks can be deceptive. Although it might look like wine, the liquid sitting in your tanks, barrels and bottles is really cash. Inventory is the biggest cash drain—or bottleneck—for most wineries; and

• Creditor payment days—another obvious temptation when cashflow is tight is to stretch out your payment terms to suppliers. However, the supplier you don’t pay today might be the one who won’t help you out when you most need it.
The only way to improve operating cashflow is to play with these levers. It really pays for every winery to look at how much control they have over each one, how much the lever can be moved and then work out the impact on cashflow. However, this is where things get a little complicated. Working out the maths really is the easy part. The challenge is to work out the business changes needed to move the levers. In many cases, quick improvements in cashflow are available by tightening up business processes like invoicing, pricing and debtor collections. Making deeper changes to cashflow often requires looking at the business model the winery is using.
Which business model gives the worst cashflow? That would have to be selling high volumes of hand-tended, aged reds from high-cost, low-yielding vineyards at low margin to overseas customers who take a long time to pay, with business operated from an expensive city office with a costly administration structure. This model ties up lots of cash and even more cash is sucked out of the business as sales volumes rise. A shrinking bank account and sleepless nights for the owners often follow.
On the other hand, the best cashflow comes from selling high volumes of high margin, early-release current vintage white wines sold through the cellar door and loyalty club using internet marketing to reach lots of customers at low cost. In this case, growth will be cash positive, so more sales means a bigger bank account and a happy bank manager. As a general rule, white wines are usually better cashflow propositions than red wines.
Most wineries make a range of products, each with different cashflow impacts. One powerful way to improve cashflow is to look for opportunities to shift the sales mix towards the better cashflow performers.
From a cashflow point of view, there’s also a strong argument for localism—sales through the cellar door or to your mailing list generate the highest margin and often the quickest payment. The further away your customers are (as you expand interstate or overseas seeking markets) the more your margins are reduced by the distribution chain, and payment tends to be slower. Also, there’s more competition, complexity and costs.
The point is that the better a winery understands the dynamics of its operating cashflow, the more chance it has of building a business that won’t break the bank. It pays to be forewarned and it’s absolutely possible to predict the cash impact of any growth or decline in your businesses.

• To hear Michael explain how to calculate cashflow with his Excel calculator in your own business visit http://www.cashcasts.com/audio/CashflowCalculatorSlide.html
For his longer seminar on setting KPIs for your business visit
http://www.cashcasts.com/audio/KPIs%20for%20Operating%20Cashflow.html
Michael Ford has developed cashflow forecasting systems for a range of Australian wineries. He is also a presenter of the WFA WineSkills program. Michael leads Growth By Design, a business consultancy that helps wineries to grow and is proud to be a WFA Partner. He is a Chartered Accountant and CPA with more than 20 years experience, including 13 years with major firms KPMG and PricewaterhouseCoopers. Email mford@growthbydesign.com.au

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