November 2004
The Monthly Newspaper of the NYSSCPA
Vol. 7, No.14

CPAs Uncork New York’s Unpredictable Wine Business

By John Savash, Finger Lakes Chapter President

Clients expect certified public accountants to account for everything, save maybe the weather.

But when vineyard owners in the Finger Lakes grape-growing region suffer subzero temperatures that unexpectedly injure their vines, CPAs have to step up to financial forecasting in an unpredictable, storm-ridden business climate.

Since vineyards and wineries are among the most important industries in New York state, many CPAs, especially those upstate or on Long Island, are faced with questions about crop failure, internal theft or inconsistent cash flow due to seasonal production. Even when they can’t predict the weather, CPAs must predict the numbers.

This year, for example, vineyard owners and grape producers will be under a tight financial squeeze. Finger Lakes growers predict crop losses of 30 to 60 percent, according to an Oct. 12 New York Agricultural Statistics Service press release, due to bitterly cold temperatures in January that hampered growth and rainy weather this summer that adversely affected fruit yields and sugar content. Nevertheless, New York growers are optimistic that with warm weather and sunshine, the fruit that remains in the vineyards will have an opportunity to ripen.

There are 176 wineries statewide, 78 of which are located in the Finger Lakes region. On average, New York state produces 40.8 million gallons of wine a year. That made New York the third-largest producer of grapes and wine in the United States (behind California and Washington) in 2003, according to the NYASS’s annual report.

The report also shows that in 2003, the grapes harvested to produce that volume were worth $38.6 million. In addition to generating industry-specific revenue, financially stable vineyards benefit many other industries, such as construction, farm equipment, glass manufacturers, transportation, advertising agencies, restaurants, bed and breakfasts, and tourism—as well as the state of New York by creating more employment and sales taxes.

Crushing Grapes, Crunching Numbers

A winery, which produces the wine that comes from grapes harvested at a vineyard, is required to hire a CPA when an audit or review is necessary. Since many wineries are closely held private companies, a bank in a loan agreement will generally require an audit or review.

When a CPA firm engages a vineyard as a client, the CPA needs to have a good understanding of cost accounting and how the manufacturing process works. According to Krista Niles, senior manager with the Rochester-based firm Mengel Metzger Barr & Company LLP, the wine manufacturing process has many unique components that could snag the accounting process.

“The types and quantities of supplies used in the production of a tank of wine are accumulated. When the wine is bottled, additional costs for the glass, label, cork, labor and overhead are also added,” Niles said. “Between the process of making the wine and bottling the wine, there are production gains and losses from things such as adding sugars, spillage and evaporation.” Plus, due to the nature of the manufacturing process, there will be many different types of inventory at year-end.

Many wineries choose to purchase rather than grow grapes to produce their wines. In either case, the crop yield for grapes will vary from year to year, affecting pricing, manufacturing costs and, inevitably, the consumer. If a winery does not have its own vineyard, certain harvest costs need to be captured and included in the production costs of the wine.

Once cost production is understood, other factors are thrown into the mix.

“Since production occurs in the winter and peak season occurs in the summer, cash flow issues can be a problem for many wineries,” Niles added.

To cover production costs, these wineries will often take out working capital or short-term loans in the winter, which they will then pay off in the summer, when cash flow is highest, according to Niles.

One of the most significant accounting issues at wineries revolves around inventory, because it can sometimes be hard to define.

“Winery inventories are varied and include wine in bulk tanks, barrels, or bottles as well as other accountable supplies such as bottles, corks, caps and labels,” Niles said. “If the winery produces sparkling wine, a process that takes longer than traditional still wines, the company will have wine that is capped and stored while in tirage.”

In addition to inventory issues pertaining to production, many wineries also have restaurants, retail wine shops and lodging facilities. These other businesses can add additional inventory issues for the CPA.

Since tourism is an important part of the winery business, a good or bad tourist season can, like the weather, significantly affect the success of the winery. According to the New York Wine and Grape Foundation, a total of 2.69 million people visited New York wineries in 2000.

As with most industries, theft can be a big problem when there’s desirable merchandise available for the taking.

“Because a bottle of wine is as easily susceptible to theft as cash in retail shops and restaurants,” Niles said, “wineries must prevent theft with secure internal controls that are monitored by periodic inventory counts.” Both tools must be closely supervised by the corporate controller.

A winery may hire a controller to work for the winery, but that will depend on the size of the winery. It is not necessary for the controller to be a CPA, but the controller should have a good understanding of cost accounting and be able to work with budgets and manage cash flow.

John Savash, CPA, is president of the NYSSCPA’s Finger Lakes Chapter and an assistant professor of accounting at Elmira College in Elmira, N.Y. He can be reached at Trusted Professional reporter Kate Prouty contributed to this article.

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