Contract Distilling & Alternating Proprietorships

Navigating the challenges and complexities in your distilling

/, General, Inventory/Sales, Production/Planning/Contract Distilling & Alt Prop

Contract distilling and alternating proprietorships are common strategies, but it’s important to understand how they can complicate your business. How will you manage inventory that different people own? How do you calculate the value? How will you report to the TTB? We outline the challenges below as well as shed some light on how generic bookkeeping software like QuickBooks could be the bottleneck in your business.

Contract Distilling

If you contract out your distilling, you’re off the hook when it comes to TTB reporting. However, if you’re the one doing the distilling, you’re responsible for everything from production, record keeping, labeling (with its name and address), label approval (COLAs), and paying taxes once the spirits leave the distillery.

Enter the challenges of contract distilling…

The Challenges of Contract Distilling

  1. The many faces of contract distilling

The biggest challenge for contract distillers is that there are countless ways to do it. The question is how you are going to track it all? One scenario could involve distilling on behalf of numerous other companies by producing a base spirit then adding flavoring to create a unique brand. Then you sell it back for private labeling. That’s just one of the many examples. The beauty of a system like OSpirits is that it doesn’t rely on generic bookkeeping on the back end, which means it’s flexible yet powerful enough to accommodate nearly any business model.

  1. Calculating FETs (Federal Excise Taxes)

Aside from properly tracking the inventory and accounting side, accurately calculating FETs (Federal Excise Taxes) remains a struggle for many contract distillers. OrchestratedSPIRITS automatically calculates this at every step of the process for streamlined reporting.

  1. Generating an Accurate TTB DRO (Distiller Report of Operations)

Finally, there’s the challenge of accurately generating the TTB DROP (Distiller’s Report of Operations). Like the FET, OSpirits is creating all the records as you go about production so come reporting time, all you need is a date range and the TTB reports are generated for you.

Distillery Management Software for Contract Distilling

Figure 1 illustrates how OSpirits distillery management software uses individual warehouses to differentiate item costs at the warehouse level instead of averaging them all together in a single warehouse. This means when you bring items like bottles or grain into stock from a contract distillery you can assign them to separate warehouses allowing you to track both the cost and remaining inventory left in the contract for better accountability.

This also eliminates the need to create multiple “phantom items” to represent the same item.

OSpirits Contract Distilling & Alt Prop

Figure 1. – “Warehouses in OSpirits

Alternating Proprietorships

Although more commonly found in the beer industry, an alternating proprietorship is a different beast defined as an arrangement in which two or more people take turns using the physical premises of a distillery.

In an alternating proprietorship, both the host and the tenant distillery is responsible for:

Check out the complete details on procedures for alternating proprietors

The Challenges of Alternating Proprietorships

In an alternating proprietorship scenario, you’ll likely have items like ingredients or packaging components that proprietor A owns, or some that proprietor B owns. The main challenges of alternating proprietorships include:

  • Keeping track of what’s produced
  • What is used to produce for each proprietor or contract
  • What inventory we have on hand for each individual proprietor or contract
  • Identifying and differentiating the values of the inventory owned between 2 proprietors
  • Generating TTB Reports for each proprietor

Why bookkeeping software can’t handle alternating proprietorships

Generic bookkeeping software like QuickBooks lacks the ability to separate a single inventory item into 2 different costs – yours and theirs. If you own bottles that cost you 20 cents and have bottles the alt prop has provided to you, generic bookkeeping software will average the cost of the 2.  The resulting cost discrepancy means you’ll likely resort to your multi-tab spreadsheet to recalculate your actual costs, or you’ll likely create “phantom items” representing the same item in the bookkeeping software to represent the inventory of contracts.

Figure 2 Illustrates how the management of a simple inventory item like bottles can be misrepresented in generic bookkeeping software.

OSpirits Contract Distilling- Limited Integration with QuickBooks

Figure 2. – “Average Costing in Bookkeeping”

TTB Reporting for Contract Distilling & Alternating Proprietorships

The final step is TTB reporting. OSpirits allows brands to be assigned to individual TTB entities so that any brands produced for that particular entity is segregated in the TTB report. Rather than manually sifting through spreadsheets or paperwork to segregate the numbers for the TTB report, all you need to do is select a dropdown from OSpirit’s TTB report interface. This allows you to generate separate TTB reports for each TTB entity with a selection from a drop-down menu.

OSpirits- Contract Distilling TTB Reports

What to look for in Distillery Management Software

You have options when it comes to comparing distillery management software. Be mindful of the fact that other distillery management software tools rely on syncing data from a web-based production tool to generic bookkeeping software like QuickBooks. Though this sounds convenient, these syncs don’t always work because they were not designed to accommodate the segregation in an alternating proprietorship scenario.

OrchestratedSPIRITS effectively handles alternating proprietorships and contract distilling scenarios for the following reasons:

  1. OSpirits associates individual brands with proprietorships
  2. OSpirits segregates who owns the inventory
  3. OSpirits provides accurate costing for each entity
  4. OSpirits can generate segregated TTB DRO & Excise Taxes for each entity

If you’re considering an alternating proprietorship or contract distilling scenario, an all-in-one solution with accounting built in is critical if you want to avoid the manual work and external spreadsheets.

By | 2017-06-22T16:30:31+00:00 August 2nd, 2016|