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3. MAKE GOOD ASSUMPTIONS An assumption is an educated guess about what you think the future will look like. When you make assumptions, you have to come up with answers to a number of different questions, from finances to human capital. What's the best way to go about creating your assumptions? We can all learn lessons from the past, so historical data can be a good starting point. Below are examples of assumptions to include in your budget. Revenues: Prior-period actuals are the best place to start when calculating your revenue assumptions. Include as much information as you have available; the more detail, the better. Pricing by SKU and channel, discounts and bill-backs, sales seasonality and vintage release timing, allocations, tasting room performance, wine club shipments, and bulk wine sales and custom crush services are examples of revenue streams you can project. Cost of Goods: Before you start working on cost of goods, ensure that your inventory costing is accurate. Avoid using a percentageof-sales approach that backs into gross margins. Grape contracts, yields and costs, bulk wine, dry goods, cost center allocations, labor rates, and facility and indirect overhead costs should be part of your cost-of-goods assumptions. Expenses: If possible, use a zero-based budgeting approach that builds up expenses from scratch, without consideration to prior periods. This approach is typically the most accurate and will provide additional insight into your cost structure. A more common method is to use prior-period actuals as a baseline for expense levels and fine-tune for the next budgeting period. International The W in 134 e C h a ll e n g e In any case, you should get department heads to validate and own the assumptions related to their teams. Payroll, bonus and staffing plans, fringe and employee benefits, sales commission, marketing programs, nonsales or inventory operating expenses, plus office and facilities expenses, are all important to include. Capital Expenditures: What major equipment purchases and development costs will be made during the upcoming year? Do you have a multiyear capital improvement plan in place? What assets might be sold? All are important questions to ask as you compile your budget. Don't forget to adjust for changes in depreciation as you add or retire assets. 4. DEVELOP A CONTINGENCY PLAN After you create your baseline budget, consider developing both upside and downside scenarios. This approach will help your business better manage through unexpected changes. You'll have examined both positive and negative outcomes at the outset, and you'll be prepared to act as these events unfold. 5. COMPLETE A MONTHLY ACTUAL-TO-BUDGET VARIANCE ANALYSIS One of the objectives of budgeting is to provide a baseline performance level against which actual performance can be measured. But this is worth doing only if action will be taken as a result of these comparisons. In too many companies, the reporting of actual results compared to budget is seen as the end of the process. If no action is taken on both positive and negative variances, then there's little point in producing them and even less point in wasting management time discussing them. By understanding actual variances to budget, you're better informed and have a clearer understanding of the causes and corrective actions you can implement for improved results. BEYOND FINANCIAL ADVANTAGES Wineries and vineyards that learn to incorporate budgeting best practices gain more than financial rewards. By closely aligning planning and budgeting, you can develop an integrated strategic and financial plan that establishes a clear road map to follow. Using successful budgeting elements can solidify the connection between operations and finance, improve communication between department heads, and improve decision making. When combined with regular forecasting and reforecasting, winery owners and their management teams can better understand and anticipate events – and better control their business. Rick Boland is a senior business consultant for Moss Adams LLP. He provides financial, operational, leadership and other advice to companies across a variety of industries, including wineries and vineyards. He has guided many companies through mergers and acquisitions, operational and debt restructuring, implementation of accounting software systems, and upgrading internal controls. He can be reached at (707) 535-4114 or rick.boland@ mossadams.com. Comments? Please e-mail us at feedback@vwmmedia.com. Two Wine Competitions in One To Enter: V I N EYA R D & WINE RY M ANAGEM ENT | Jan - Feb 2014 w w w. v wm m e d i a . c o m