Session 5: Financial Management

Session 5: Financial Management

Session 4: Enterprise Budget Develop enterprise budget Decide on Production System How did they decide on pricing Where will they market Fixed cost Revenue = Price X Quantity

Review Homework Develop a enterprise budget How did you decide on size to start What equipment do you need What prices and what yields What will you need to produce the product

Review Business Plan In AG PLAN-Operations Section Products Services Production systems Customer Service

Today s Goals: What records do you need to keep for good financial management? What are the components of balance sheet, cash flow statement, and income statement? Why do you track cash flow? How do you use financial statements?

Profit = Income Expenses

Income livestock $1,425 Crops $24,500 Expenses $32,400 What expenses are different on income statement?

Farm Goal We would like our farm to make $20,000 net profit in 2019.

Farm Goal We would like our farm to make $20,000 net profit in 2019. What information do we need to know? Gross sales Amount vegetables or animals sold Prices sold each sold Inputs needed for production (Labor, Equipment, Fertilizer, Seed) What machinery and equipment needed?

Record Keeping to Compare Crops *From: Organic Farmers Business Handbook Richard Wiswall

Record Keeping Allows You See Progress Toward Goals

Record Keeping Basics Why do we keep records? Who should keep your records? Do you need an accountant? What accounting software should you use? When should you start?

Cash vs Accrual Accounting Cash Accounting: Reporting of your revenues and expenses at the time they are actually received or paid Accrual Accounting: The recognition of revenues and expenses at the time they are earned or incurred, regardless of when cash for transaction is received or paid out

Single and Double Entry Systems Single entry system: Using only income and expenses accounts, as well as some of the other records listed on general records. Double entry system: Every transaction is records as a debit and credit. A sale could be both a delivery and a receipt of payment

What will you use your records for? For taxes For management decisions What equipment you need? When should you buy machinery? Keeping up with labor Keeping up with feed costs If you are borrowing money

Essential Records for Business Keep your records as simple as possible Business checkbook/credit Accounts payable card Record Book (receipts and Accounts receivable expenses record) Family Living Expense Inventory reports records Market sales Financial Statements Production Records Balance sheet Labor records Income statements Depreciation schedule Cash Flow statements

Best Practices for Record Keeping NEED SEPARATE FARM ACCOUNT As much detail as you can - individual enterprises - to make decisions Base accounting period on crop Pay all farm bills by check Deposit all income Avoid using business account to pay personal expenses

Best Practices for Record Keeping NEED SEPARATE FARM ACCOUNT Balance your bank account each month Post receipts once a week Credit card statement Own record/paper receipts Keep your bank statements and cancelled checks at least three years. Never write a check for cash

Think back to our previous sessions... What is depreciation? The using up of a capital asset (something that will last more than one year) Land can never be depreciated

From Session 3... Resource Inventory Assets Machinery Buildings Livestock Liabilities List of loans Why Inventory?

Depreciation Record and Asset Inventory Description Date acquired Cost or other basis Life used for depreciation Year 20 Method used Depreciation balance beginning of year Depreciation for this year Tractor Ford 601 2003 $10,000 15 straight line 6,666 666

You need to track income... And to do that, you need a map and standardized units

Production Units Field Map Greenhouse sqft For record keeping and analysis Standardize bed size Ex: 300 feet long raised bed and 5.5 ft wide. How many beds per acre? 1,650 sqft each bed Divide area of acre (43,560 sqft) by bed area 26.40 beds per acre

Tracking Income How much of product harvested by crop How much of product leaves farm What is sales value Detail by crop or total, sales by market? Farmers market beginning inventory and end of market Compile all market outlets sales

Production Records

Harvest Records Unit? lbs may need scale

Market Sales One sheet for each market Add up total sales for the year for each product Add up total sales for each market Total quantity sold CSA

Market Sales What to Do with This information Summary of all sales income Trends for each market and crop Compare sales year to year How does your sales compare to your crop goals

Seed and Plant Records

Tracking Expenses Types of expenses

Deductible Expenses Deductible expenses are expenses that are allowed by IRS when computing taxable income at end of your business tax year Two categories Fully deductible Depreciable

Overhead Costs Expense Description Cost Mortgage annual payment Farm % of total, not house & house portion 600 Depreciation accounts for replacement 2000 Property taxes Farm % 800 Insurance Health & Fire 4000 Office Supplies 1100 Website Subscription & Fees 400

Expense Categories Fertilizer Fuel & oil Propane Truck gas Greenhouse supplies Insurance Interest Repairs & maintenance Seed & supplies Taxes Utilities Rent paid

Record of Farm Expenses RECORD OF FARM EXPENSES 1 2 3 4 5 6 DATE FROM WHOM PURCHASED QUANTITY WHAT CK# MACHINERY OPERATION EXPENSES Include details of transactions for future reference. Be sure to put down all needed information. Use two lines, if necessary. Include the name of the person or company. Put the amount of each item, tons of hay, bushels of grain, dozens of eggs, etc., and describe the item, kind of fertilizer or repairs or kind of custom work. Also include bank check number. TOTAL COST HIRED LABOR Gasoline, Oil, Diesel, Grease Repairs and Supplies Small tools Machine Hire, Custom Work Always use check to pay expenses Set up columns based on schedule F or your own categories SUBTOTALS (carry to following pages) Carkner, R.W. (2000) Farm Business Records: An Introduction, p. 10

Expense Ledger Some expense are more easily documented that other Out of pocket expenses ( variable expenses) Labor: hired and family Allocating over head costs to crops

Allocation of Capital Assets Cost Costs like buildings, machinery costs are difficult to allocate to a specific enterprise. Percent of revenue Percent of acreage

Tracking Labor

Best Practices for Tracking Labor Set up a work order Estimate time per task Occasionally have employee record Track difference in employee work time per task Track hours per employee Do labor analysis of your time

Independent Contractors Independent contractors not eligible for unemployment, disability or workers compensation benefits. Do not need to pay employee taxes to independent contractors

Crop Budgets Analysis What are expenses compared to total revenue? How many labor hours required? When is labor needed? What are machinery cost? What is breakeven price?

Financial Management

Financial Management Start up Costs Balance Sheet Income Statement Cash Flow Financial Statement Analysis

Start Up Costs Beef Fixed Costs Years Total Per Cow Pasture 300 12 Pasture Equipment 1,550 20 77.5 3.10 Water Infrast. 5,000 20 250 10 Fencing 23,054 20 1,053 42 Tractor 12,000 20 300 * 12 Truck 15,000 15 500 20 Equipment 12,200 15 813 32 Corral 10,000 20 500 20 Total Fixed Cost $3,794 $151

Start Up Cost: Agritourism Expenses Item Cost Estimate Barn, fence renovation $45,000 Parking $3,000 Signage $1,500 Wagon adjustment $400 Playground development $1,200 Picnic tables $560 Walking trails $600 Labor $2,000 Total Start up Costs $54,260

Balance Sheet Defining the entity Personal assets and liabilities included Business only Valuation methods Market based Book value

Balance Sheet A balance sheet shows the financial position of a business as of a fixed date It is a picture of what your business owns and owes at a particular given moment Balance sheet example

Balance Sheet Assets Liabilities Current Cash Savings Inventory Growing Crop Long Term Equipment Buildings Land Net Worth

Liquidity Liquidity is the availability of a business to generate enough cash to pay bills without disrupting the business. Current Ratio = CA/CL CA=current assets $26,404 CL= current liabilities $17,806 Current Ratio = 1.48

Liquidity Working Capital is difference between the current assets and current liabilities liabilities. Working Capital CA = $26,404 CL = $17,806 Working Capital $8,598

Solvency Debt-Asset ratio shows the relationship between assets and liabilities Debt to Assets = TL/TA TL = Total Liabilities $104,779 TA = Business Assets $ 229,468 Debt to Asset Ratio = 45.6 %

Smith Acres Farm: Sample Income State See Handout: Smith Farm Income Statement

Income Statement The income statement (profit and loss) shows where your money has come from and where it was spent over a specific period of time usually your tax year. Revenue Expenses = Net Income

Income Statement Uses of an income statement Summarize revenues and expenses Determine profit or loss Explain changes in owner equity Calculate financial measures for profitability, financial efficiency, loan repayment capacity

Income Statement Income (Revenue) Cash Income come from sale of livestock, crops, government payments, tax credits, crop insurance payments Do not include sale of land, machinery or depreciable assets, nonfarm income, or loan received Adjust farm income by changes in inventory values Subtract beginning of the year values from the end of the year value for the income adjustment

Income Statement Expenses Variable expenses what amounts did you actually spend on items directly related to your crop or service Fertilizer, chemicals, feed, repairs, seed, hired labor Fixed expenses Insurance, depreciation on machinery and equipment

Income Statement Cash Expenses Sometimes start with Schedule F Do not include death loss of livestock Income tax and SS are considered personal expenses unless farm is corporation Interest paid on all farm loans is a cash expense but the principal is not Do not include purchases of capital assets such a machinery or equipment. Family wages

Income Statement Adjustment to Expenses: some cash expenses paid for in one year may not be used until the following year Subtract the ending value of supply inventories from the beginning value to find net adjustment Depreciation on machinery, equipment is added to expenses If breeding livestock is included under beginning and ending inventory do not include depreciation expense for them

Cash Flow Statement A third of businesses fail due to lack of cash flow Historical cash flow similar to a check book Pro Forma Cash Flow Statement identifies when cash is expected to be received and when it must be spent to pay bills and debts The cash flow statement deals only with actual cash transactions and not with depreciation and other non cash expense items.

Cash Flow and Income Statements Income Statements include only income and deductible expense items Cash Flow reflects all money flowing in and out of the business

Cash Flow and Income Statements Example: Loan payments of $9,000 during the year, $3,000 of which is interest Cash flow statement would include all $9,000 Income Statement would record only interest expense

Cash Flow and Income Statements Example: Purchase a vehicle for $15,000 cash Cash flow statement would include full $15,000 Income Statement would record only projected depreciation for the year

Financial Statement Analysis

Financial Statement Analysis Gross Profit Margin is the percentage of each sales dollar remaining after a business has paid for its goods Gross Profit Margin= Gross Profit / Sales The normal rate depends on the business you are in

Financial Statement Analysis Operating Profit Margin is operating profit margin ignoring taxes and interest. Operating Profit Margin = Income from Operations / Sales The higher the operating profit margin number the better

Financial Statement Analysis Net Profit Margin is measure of success with respect to earnings on sales Net Profit Margin = Net profit / Sales The higher the net profit margin number the better

Financial Statement Analysis Investment Measures Return on Investment is Net Profit / Total Assets

Ten Minute Break

Financial Statement Analysis If the operating profit margin is low Did you have enough mark up on your goods? Are your operating expenses too high? Are your interest expenses too high?

In-Class Activity

In-Class Exercise The Thomas family is planning a new farm a year ago. They have asked for you to help develop a balance sheet. You asked them to make a list of all the items that will need to be included on the balance sheet.

Financial Statement Analysis Financial Statements Analysis Liquidity analysis Profitability analysis Measures of debit Measures of investment

Financial Management Develop your record keeping system Spread sheets Quick books Hand ledgers Financial Statements

How well did we meet today s goals: What records do you need to keep for good financial management? What are the components of balance sheet, cash flow statement, and income statement? Why do you track cash flow? How do you use financial statements?

Homework Explanation In Ag Plan, develop a Balance Sheet & Cash Flow

Evaluation

Field Day Take your worksheet for the field day with you to ensure you get the most from the experience!