Specialty Farmers Workshop Financials Sponsored by: Hawaii Forest Industry Association Hawaii Forest Institute Presented by: Hawaii Small Business Development Center Judi Mellon

Sounds & is Easy…Step by Step Think it out: I have __ acres of leased (or owned) property on which will grow ___ number of crops which will need to be planted in year 20__ and will be harvested in year __ and yield ___. Estimated revenue of $___ in Year ___ with total costs of $___ and netting a profit of $___.

Two Sides to Every Story 10 acres to plant 1,000 Christmas trees in 2016. Ready to harvest in 300 trees in 2021 at estimated $50/each =$15,000 in gross revenue with total costs of $5,000 netting profit of $10,000. Same formula, change the Business Plan: Yield 1,000 Hawaii grown trees at retail for $110 per pound=$110,000 in gross revenue with total costs of $50,000 netting a profit of $60,000.

Very Different Plans Which Farm are you? Which is more appropriate for your life & land? Each is very different Business Plan Type of Marketing? Advertising? Type of Sales? Online? Direct to Consumer? Selling wholesale? Selling as a Commodity? Transporting/Shipping? Business plan must include financial plan

Key Financial Reports Income Statement Balance Sheet Cash Flow Projection

Sample Income Statement Sales $300,000 -Direct Costs (Cost of Goods Sold) 90,000 Gross Profit $210,000 -Operating Expenses -(Selling, general, & admin.) 160,000 Net Income $ 50,000

Sample Balance Sheet (what you own & what you owe) Assets (Own): Cash $30,000 Acct Rec 5,000 Inventory ____55,000 Total Current Assets $ 90,000 Equipment $30,000 Building 50,000 Total Fixed $ 80,000 Total Assets $170,000 Liabilities (Owe): Acct Payable $20,000 Current Liab $20,000 Loan Payable $50,000 Total Long-Term$50,000 Total Liabilities $70,000 Net Income $60,000 Owners Equity $40,000 Total OE $100,000 Total Liab+OE $170,000

Sample Cash Flow Projection 12-Month Cash Flow Projection Month   Start-Up 1 2 3 4 5 6 7 8 9 10 11 12 TOTAL 1. CASH ON HAND (beg'g month) 5,000 14,500 26,500 32,200 40,100 40,800 37,500 34,200 26,900 3,200 700 19,900 2. CASH RECEIPTS Sales 40,000 14,000 10,000 18,000 28,000 300,000 Cost of Goods 8,000 2,000 16,000 90,000 - Loan or Other Cash Injection 3. TOTAL CASH RECEIPTS 32,000 26,000 12,000 (6,000) 38,000 228,000 4. TOTAL CASH AVAILABLE 37,000 46,500 52,500 58,200 52,100 48,800 45,500 44,200 20,900 19,200 38,700 45,900 5. CASH PAID OUT Operating Expenses Salaries and wages 100,000 Payroll taxes 1,000 20,000 Lease land 4,000 Equipment Maintenance 1,500 Insurance 1,800 Utilities 500 6,000 Telephone 150 Office supplies & Misc Shipping 200 Marketing and advertising 600 900 5,500 Auto expense gas & maintenance 300 3,600 Interest on loan Cash Out on Operating Expenses 16,700 17,000 14,800 14,400 15,200 15,500 160,000 SubTotal Cash 17,800 29,800 35,500 43,400 44,100 36,200 6,500 23,200 30,700 68,000 Loan Principal Payment Capital Purchases- Equipment/Bldg Owner's Withdrawal 3,000 36,000 6. NON-OPERATING CASH PAID OUT 3,300 9,300 45,600 7. CASH BALANCE 27,400

Cash Flow Projection Cash flow statement shows cash; income statement shows profitability Lists flows of cash in & out of business Important for farm business – need cash to continue before crop comes in Shows amount & ALSO timing of cash flows Projects cash balance for each month.

Cash Flow Projection Tracking Money Coming In and Going Out Sell product Receive money from proceeds of loan (debt) Receive money from new investor or owner (equity) Money Going Out: Pay expenses incurred by farm Purchase asset, such as equipment Make payments to loan/liability Distribute farm earnings to owners

Takeaways Devise your method to track income & expenses Know 3 financial reports: Income Statement – income/expenses for period Balance Sheet – what you own/what you owe Cash Flow Projection – how cash is expected to flow

Cost of Production Costs incurred by farm to produce a good

Why Must I Know Cost of Production? Tells you how to price your item Ensures charging more than it costs to make Ensures you can be profitable!

Cost of Production Components Fixed Costs + Variable Costs = Production Costs Fixed Cost (operating expenses) Expenses that occur each month regardless of output Also known as indirect cost, operating expenses or overhead Ex: Rent, Management Salaries, Utilities Variable Cost/Direct Costs or Cost of Goods Sold Expenses that vary directly with production of good/product Ex: Raw Materials and Production Labor

Fixed Costs (FC) Must Pay No Matter Production Level Lease of land Administrative salaries Marketing materials/Advertising Utilities Website hosting/maintenance Freight-out (is negotiable)

Variable Costs (VC) Fluctuates Depending on Production/Sales Production labor, including payroll taxes & benefits, direct supervisory labor Use of equipment Seed, feed, ingredients, freight-in Packaging materials, boxes, tape

Fixed Costs (FC) & Variable Costs (VC) Understand difference between FC & VC (COGS) because it effect your Business Model and Average Unit cost

Activity 1: Fixed vs. Variable Costs Santa’s Christmas Trees Jan 1 – Dec 31, 2015 Expense: Lease of land $1000 Owner’s Salary 3000 Advertising 200 Debit/Credit Card Fees 100 Production Labor 1500 Insurance 100 Interest Expense 200 Seedlings 500 Bank Service Charges 100 Utilities 150 Feed/Fertilizer 300 Total $ 7150

Average Cost per Unit (AC) Total Cost/Quantity = Average Cost per Unit Cost of Goods Sold (COGS) will change based on variable costs

Average Costs Qty FC + VC = TC Avg Cost 0 $100 $ 0 $100 Cost of Goods Sold (COGS) changes based on variable costs Qty FC + VC = TC Avg Cost 0 $100 $ 0 $100 10 $100 $ 20 $120 $12.00 20 $100 $ 40 $140 $7.00 40 $100 $ 80 $180 $4.50 $100 $140 $240 $3.00

Takeaways Know your total cost of production! Ensure charging more than costs Include shipping in & out in cost calculation Set pricing for each class – wholesale, distributor, broker, direct to consumer Know your competitor’s prices Adjust your price when costs go up

Know your Terminology Margin vs. Mark-up Don’t confuse Margin & Mark-Up Margin: Selling price minus total cost divided by selling price $3.50 - $2.00 / $3.50 = 42.9% margin Mark up: Selling price minus total cost divided by total cost $3.50 - $2.00 / $2.00 = 75% markup Work it both ways!

Wholesale Mark-up Sales Direct to Retailer Varies a lot depending on demand for product 75%- 150% $3.50 - $2.00 / $2.00 = 75% markup $5.00 - $2.00 / $2.00 = 150% markup You must gauge: What price can retailer sell product? Know your competitors Getting someone to distribute your product is key, BUT do not discount product price below Average Cost per Unit for current production or you lose money

Taking Product Direct to Market Plan excellent display! Must budget costs of getting to market Farmers Market, Trade Show, Events Travel costs Trade Show/Market fees Transporting or Shipping products Labor at event Who’s going to work the Event? Good at Sales and Marketing?

Business Model Canvas