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.

Session 5: Financial Management

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?

[Guest Speaker Details]

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 Turn this into a map

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?

We would like our farm to make $35,000 net profit in 2013. Farm Goal We would like our farm to make $35,000 net profit in 2013.

Farm Goal We 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 to Compare Crops *From: Organic Farmers Business Handbook Richard Wiswall Variation in income across crops; note which make money and which do not, this is why you need records on individual crops; you don’t know why you are or are not meeting your goals if you don’t have records

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? Insert answers to questions here

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 “You are going to use cash accounting, it’s just like a check book.”

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 Your accountant is going to want you to do double entry (it is more correct) but you will probably do single entry. (doing something is better than not doing anything)

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 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 “These are all the records we are going to talk about today.” Be sure to have separate business and personal account Left column is required for taxes, both columns are necessary for management decisions

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 Liabilities Why Inventory? 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 From session 4

Depreciation Record and Asset Inventory Year 20_____ 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    This is a reminder, do not walk through all items Carkner, R.W. (2000) Farm Business Records: An Introduction, p. 12

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

One sheet for each market 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

What to Do with This information 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 Some varieties do better than others, keep track of production by variety to make decisions in the future

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 to account for replacement 2000 Property taxes Farm % 800 Insurance Health & Fire 4000 Office Supplies 1100 Website Subscription & Fees 400 Make this with a few examples, easier to read, “allocate over all enterprises”

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

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 SUBTOTALS (carry to following pages) Always use check to pay expenses Set up columns based on schedule F or your own categories Break expenses into categories so that you can track them 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

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

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

Financial Management

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

Balance Sheet Defining the entity Valuation methods 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 Refer back to warm up example here (case study from notebook)

Balance Sheet Assets Liabilities Net Worth Current Cash Savings Inventory Growing Crop Long Term Equipment Buildings Land Separate assets by current and long term. Current = cash, savings accounts, inventory, growing crops. Long Term = equipment, building, land Liabilities: Current = accounts payable, current portion of a loan, Long Term = money owed on land, livestock, equipment (anything that’s not due this year) Net Worth = assets - liabilities Current = 1 year or less Net Worth

Beef Balance Sheet example What happens when we add animals as assets? And when we add the liability for buying them?

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 CL= current liabilities

Liquidity Net capital ratio shows whether or not the total assets are adequate to cover total liabilities. Net Capital Ratio = TA/TL

Solvency Debt-equity ratio shows the relationship between owned and borrowed capital Debt to Equity = TL/OE TL = total liabilities OE = owners equity

Ten Minute Break

In-Class Activity

In-Class Exercise The 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.

Smith Acres Farm 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 $ 50,000 Timber: 20 acres @ $1,500 $ 30,000 Barn, coop and well About 3 acres $ 8,000 Used Machinery & Equipment $ 15,000 TOTAL FARM ASSETS $133,000 Change this to showing and explaining an example of an income statement

Smith Acres Farm Balance Sheet Current Liabilities Accounts Payable – Financial Software $137   Long-Term Liabilities Farm Note $ 10,000 TOTAL LIABILITIES $ 10,137 FARM NET WORTH $122,863

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 Cash 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 EXPENSES Feed Purchased 1,750 lbs @$0.25 $437.50 Plus: Feed on hand at beginning of month 50 lbs @ $0.25 +$ 12.50 Less: Ending feed on Hand 300 lbs @ $0.25 -$ 75.00 Total feed expense $375 Other production expenses (feed supplements, bedding, cartons) -$100 Overhead Expense (utilities, promotion, depreciation) -$ 15 TOTAL EXPENSES $490.00 NET FARM INCOME $142.50

Smiths Acres Income Statement Cash income $37,040 Home value of eggs and strawberries used 250 TOTAL INCOME $37,290  

Smiths Acres Income Statement 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 NET FARM INCOME $ 10,884 Value of Operator Labor $ 5,150

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

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?

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

Evaluation Add your evaluation link HERE

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