Warm-up to Session 5
On the blank balance sheet you have been given and using the case study in your
participant notebooks, bring the fixed cost over from the capital start up budget.
Review Take Home
■ Develop your Enterprise Budgets
■ In AG PLAN
■ Products
■ Services
■ Production systems
■ Customers
Review of Field Day
Refer to the notes you took during the field trip:■ What decision-making processes did the
farmer use that you would use?■ How will you decide on crops, pricing, and
size of enterprise?
Last Session 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
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?
Farm GoalWe would like our farm to make $35,000 net profit in 2013.
■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 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
■ Business checkbook■ Record Book (receipts and
expenses record)■ Inventory reports■ Market sales
■ Production Records■ Labor records■ Depreciation schedule
■ Accounts payable■ Accounts receivable■ Family Living Expense
records■ Financial Statements
■ Balance sheet■ Income statements■ Cash Flow statements
Keep your records as simple as possible
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
From Session 3...
■ Resource Inventory
■ Assets
■ Machinery
■ Buildings
■ Livestock
■ Liabilities
■ List of loans
■ Why Inventory?
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
Depreciation Record and Asset Inventory
Description Date acquired
Cost or other basis
Life used for depreciation
Method used Depreciation
balance beginning of year
Depreciation for this year
Tractor Ford 601 2003 $10,000 15 straight line 6,666 666
Year 20_____
Carkner, R.W. (2000) Farm Business Records: An Introduction, p. 12
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
Market Sales
One sheet for each marketAdd up total sales for the year for each product
Add up total sales for each marketTotal quantity sold
CSA
Market Sales
What to Do with This informationSummary of all sales income
Trends for each market and cropCompare sales year to year
How does your sales compare to your crop goals
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 to account 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 EXPENSESInclude 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
SuppliesSmall tools
Machine Hire,
Custom Work
SUBTOTALS (carry to following pages)
Carkner, R.W. (2000) Farm Business Records: An Introduction, p. 10
Always use check to pay expensesSet up columns based on schedule F or
your own categories
Expense Ledger
Some expense are more easily documented that otherOut of pocket expenses ( variable expenses)
Labor: hired and familyAllocating over head costs to crops
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
Independent Contractors
■ Independent contractors
■ not eligible for unemployment, disability or workers compensation benefits.
■ Do not need to pay employee taxes to independent contractors
Financial Management
■ Start up Costs
■ Balance Sheet
■ Income Statement
■ Cash Flow
■ Financial Statement Analysis
■ Breakeven Analysis
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
Net Worth
Assets Liabilities
● Current○ Cash○ Savings○ Inventory○ Growing Crop
● Long Term○ Equipment○ Buildings○ Land
Beef Balance Sheet example
What happens when we add animals as assets? And when we add the liability for buying them?
LiquidityLiquidity is the availability of a business to generate enough cash to pay bills without disrupting the business.
Current Ratio = CA/CL
CA=current assets
CL= current liabilities
LiquidityNet capital ratio shows whether or not the total assets are adequate to cover total liabilities.
Net Capital Ratio = TA/TL
SolvencyDebt-equity ratio shows the relationship between owned and borrowed capital
Debt to Equity = TL/OE
TL = total liabilities
OE = owners equity
In-Class ExerciseThe Thomas family started “New Farms” a year
ago. They have heard that you went through NC
Farm School and they asked you for help in
developing what their balance sheet should
look like for their “New Farms”. You asked them
to make a list of all the items that will need to
be included on the balance sheet.
Current Assets
Cash in Bank $ 30,000
Long-Term (Fixed and Intermediate) Assets
Farmland and Improvements (not including residence and three acres) Pasture: 20 acres @ $2,500 $ 50,000Timber: 20 acres @ $1,500 $ 30,000Barn, coop and well About 3 acres $ 8,000Used Machinery & Equipment $ 15,000
TOTAL FARM ASSETS $133,000
Smith Acres Farm Balance Sheet
Current LiabilitiesAccounts Payable – Financial Software
$137
Long-Term Liabilities Farm Note $ 10,000
TOTAL LIABILITIES $ 10,137
FARM NET WORTH $122,863
Smith Acres Farm Balance Sheet
Smith Balance Sheet
■ Working Capital (Current Assets – Current Liabilities)
$30,000 - $137 = $29,863
■ Current Ratio (Current Assets ÷ Current Liabilities)$30,000 ÷ $137 = 219
■ Debt-to-Equity Ratio (Total Liabilities ÷ Owner’s Equity)$10,000 ÷ $122,863 = 0.083
■ Equity-to-Asset Ratio (Owner’s Equity ÷ Total Assets) $122,863 ÷ $133,000 = 0.924
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 Case Study
INCOMECash income from Egg Sales
$625.00
Home value of eggs used (5 dozen @$2.50)12.50
Total income $632.50
Income Statement Case Study
EXPENSESFeed Purchased 1,750 lbs @$0.25
$437.50Plus: Feed on hand at beginning of month 50 lbs @ $0.25
+$ 12.50Less: Ending feed on Hand 300 lbs @ $0.25
-$ 75.00Total feed expense $375
Other production expenses (feed supplements, bedding, cartons) -$100Overhead Expense (utilities, promotion, depreciation)
-$ 15TOTAL EXPENSES $490.00NET FARM INCOME $142.50
Smiths Acres Income Statement
Cash income $37,040
Home value of eggs and strawberries used 250
TOTAL INCOME $37,290
EXPENSES
Operating Expenses $21,421
Plus: Feed on hand at beginning of year 100 lbs @ $0.25 $ 25
Less: Ending feed on Hand 300 lbs @ $0.25 $ 75
Egg and strawberry cartons on Hand $ 125
Adjusted Operating Expense $21,226
Farm Interest Paid 1,000
Depreciation 4,180
TOTAL EXPENSES $ 26,406
Smiths Acres Income Statement
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 isNet Profit / Total Assets
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?
Smith Acres Farm: Sample Cash Flow Projection for Strawberries*
See Handout: Strawberry Cash Flow Statement
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 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?