Ask the Collective
The questions independent drinks founders ask most — answered. Distilled from years of community knowledge so the good stuff never disappears in the feed again.
Should duty be included or excluded from gross profit margin calculations in drinks business financial reporting?
The industry standard is to report gross profit margins on a Net Sales Value (NSV) basis, which excludes duty, VAT, and trade promotions from Gross Sales Value (GSV). This is how major drinks companies like Diageo structure their reporting. Duty should be treated as a separate line item rather than lumped into general COGS, allowing clearer visibility of actual margins and easier comparison between UK and export sales (where duty isn't paid). One member implemented a separate nominal code for duty in their accounting system specifically to isolate it from COGS, enabling brand and customer-level margin analysis. While financial accounts must include duty in turnover and COGS per accounting standards, management accounts can separate it out for analysis purposes. Members note this approach prevents duty rate changes artificially distorting apparent margins and gives a more accurate representation of operational performance. When raising capital, presenting margins on a gross sales (duty-inclusive) basis will damage credibility with industry-familiar investors. The practical challenge is that with multiple SKUs carrying different duty rates, systems need proper setup to automatically extract duty from GSV each month—members recommend examining Diageo's published chart of accounts as a template for structuring your own reporting framework.
Should production and labour costs be classified as COGS or overheads in P&L statements?
The classification depends on whether costs are directly attributable to the production of individual units. **Direct, per-unit costs go into COGS; fixed and shared costs go into overheads.** **What belongs in COGS (pure unit economics):** - Filling/bottling fees (outsourced production services directly linked to product output) - Ingredients, glass, caps, and labels (per-unit variable costs) - Direct production labour *if* it can be attributed to conversion of raw materials into finished goods - Per-unit label costs (split tooling/origination fees into overheads, per-label fees into COGS) **What belongs in overheads:** - Production manager salaries and brewer/distilling staff wages (unless they perform *only* direct conversion work with no other business functions) - Storage and warehouse fees - Rent on production plant - Product receiving fees - Shared facility costs like electricity **Key principle:** Members recommend treating COGS as pure unit economics—only costs that scale directly with volume. If staff perform multiple functions or their labour cannot be directly attributed to converting raw goods into finished product, they belong in overheads. Some members argue for including labour in COGS if tracking cost-per-unit is important for their production model, but this requires clear delineation of when direct costs stop being attributable. **Standard reference:** IAS 2 governs the treatment of inventory costs and conversion costs. Members also noted that allocating labour and overhead to per-unit costs can be contentious with accountants—one member wished they'd "stood their ground" on this decision.
Should storage and logistics costs be included in COGS or separated when calculating gross profit, especially for export customers on ex-works terms?
Members consistently include storage and logistics costs in COGS rather than treating them as separate line items on the P&L. The reasoning is straightforward: these costs are inherent to getting product to customers and should therefore be factored into gross margin calculations. **Key recommendations:** - **Include in COGS** — Members treat storage and logistics as part of COGS across the board, as the product cannot reach customers without these costs being incurred. - **Use nominal codes or profit centres for visibility** — If you want to see profit differential between channels (e.g. export vs. domestic), set up separate nominal codes or profit centres within your accounting system for import and export stock. This lets you report separately while still including these costs in COGS. - **Handle ex-works carefully** — For export customers on ex-works terms, the same principle applies: calculate and include the logistics cost in your COGS to understand true product profitability, even though the customer will bear the final shipping cost. **Note:** This approach ensures your gross profit reflects the true economic cost of goods sold, regardless of whether customers are domestic or international.
Should the cost of transporting distilled product from the production facility to duty-suspended storage (like an LCB warehouse) be included in COGS?
Yes, members consistently include delivery costs from distillery to duty-suspended storage as part of COGS. This reflects the principle that all costs to get the product into a distribution-ready state — from production through to the point it's stored and ready to ship to customers — should be captured in COGS. Once the product leaves the warehouse/storage location and moves to customers, that freight is treated separately as a distribution cost. The rationale is that the journey to duty-suspended storage is part of the creation and preparation process, not the sales/distribution phase.
Should the cost of bonded storage be included in COGS (cost of goods sold)?
Yes, members recommend counting bonded storage costs as part of COGS. Multiple members confirmed this approach in practice.