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Module 3: Introduction to Budgets and Financial Statements
Business Management Curriculum Module 3: Introduction to Budgets and Financial Statements Developing and keeping a record keeping system to create budgets and financial statements is the first steps to having data to be able to analyze a situation. This module goes over budgets and financial statements. Module 4 will build on that and show how to take the information and do financial analysis and develop strategies.
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Why Keep Records? Taxes: records provide the documentation needed to deduct the production costs Government Programs: records are required for participation; EQIP, NAP, LRP, Rainfall Insurance Loans/credit: financial records are required to obtain loans or other forms of credit Farm management and planning: records will help you make informed management decisions and plan for the future There are a variety of reasons for keeping records. All of them are designed to strengthen your business. First, taxes are a part of all businesses. In their simplest forms, records can provide you with the documentation needed to deduct the production costs with your operation. Second, records are also required for participation in many federal assistance programs, including crop and farm revenue insurance, organic certification, loans, cost-share programs, and conservation reserve. Next, there are many forms of financial assistance available to farming enterprises, however, financial records are required to obtain loans or other forms of credit from banks or government organizations. Fourth, both production and financial records may be required in order to lease or buy additional land. These records help decision-makers see that your operation is sound and that you will be able to pay for the additional acres you obtain. Finally, business records will help you make informed management decisions and plan for the future. Without knowing which enterprises make money or which management techniques increase production and are most cost effective, you can easily make a bad decision that can ultimately put you out of business.
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Which Animal? Profit? Profit?
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Three Legs Supporting Cow-Calf Industry
Records of all three items linked together are needed to make good management decisions Economics Animal Range
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What Records Should I Keep?
How Much is Enough? You want to end up with a set of records that: Fits your operation Is easy to maintain Provides the information you need to make good decisions for your operation Tells a story about your operation While in many cases more detailed records lead to better decisions, it is also important not to get lost in the details. This is especially true if you have never kept records before or you are just starting out. Many times people start out trying to do too much and end up getting frustrated. They often quit before they have anything to show for their efforts. Sometimes the records they have put together do not achieve the goals they set out to accomplish. To avoid these pitfalls, start with the basics. As you become increasingly comfortable, you can begin to fill in the missing details. “Everything that can be counted doesn’t necessarily count; everything that counts cannot necessarily be counted.” – William Bruce Cameron
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Types of Records Hand Written Spreadsheets Computers
These differ based upon the information required and also what they show. Each of them are discussed later.
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Basic Record Keeping: 5 Easy Steps
Five Steps: Step 1: Keep all income and expense receipts Step 2: Record business transactions Step 3: Transfer entries into Monthly Ledger Step 4: Estimate farm profit or loss Step 5: Enterprise analysis A record keeping system does not have to be complicated to be effective. In this module, you will learn a basic record keeping system to get you started keeping records for your own operation. This system consists of five easy steps. Some steps are performed daily, some weekly, some monthly, and some yearly. Source: Getting on Track: Better Management Through Basic Ag Records.
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V --- V 911 Reliable Rainy Self
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1/05/17 Lower to Upper Tank 8 Avg. BCS 5 150 4/12/17 Upper Tank to River Side 7 Avg. BCS 4 146 4
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1/05/17 Lower good Avg. BCS 5 150 4/12/17 Upper Fair Avg. BCS 4 150 146 4/12/17 River Side Good Avg. BCS 4 146
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Table of Content SECTION 1: ANIMAL RECORDS
Information: Treatment Records BC Scoring for Cattle Records: Animal Inventory Cow/Ewe/Doe Treatment Records Calf/Lamb/Kid Treatment Records Bull/Ram/Billy Treatment Records Livestock Sale Records Information: Basic Record Keeping for Horse Health Vacc. Guidelines for Horses Records: Horse Records
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Table of Content SECTION 2: FINANCIAL RECORDS
Information: Financial Records for Livestock Operations Records: Monthly Financial Summary Annual Financial Summary Receipts
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Text To Add To Records
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Reasons to Use Financial Statements and Budgets
Key to understanding your business from financial point of view Help you make financial decisions Provide data needed for financial analysis Most people do not like keeping records. They may also be intimidated about how to start keeping records or how to assemble their information. This module will cover some basics. This slide show the motivation to actually do it. Without information about their own operation or idea, it is impossible to analyze it.
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Types of Budgets Whole Farm Budgets Enterprise Budgets Partial Budgets
These differ based upon the information required and also what they show. Each of them are discussed later.
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Types of Costs Variable Cost: When I plant another acre, my total cost will increase Seed, chemicals, labor, etc. Fixed Cost: Stays the same whether I plant another acre or not Depreciation, interest, long-term loans Insurance and property tax There are different ways to categorize and assemble costs. The whole farm and enterprise budgets will separate the costs in these two categories. This will also be needed when we perform financial analysis in the next module.
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Whole Farm/Ranch Budget
A detailed listing of resources of the entire business and a plan of how resources will be used. Used appropriately when planning for an entire ranch operation or when a desired change in one part of the operation may affect several other parts of the operation. This budget would require the most information. It is similar to an income statement or profit loss statement.
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Example of a Whole Farm Budget
Revenue streams from the whole farm are totaled on top Operating costs are the variable costs for the whole farm The next two slides show an example of a mixed vegetable farm. On this slide is the Gross Income which is also referred to as revenue or sales. The variable costs are also listed along with income above variable costs. Sometimes that could also be returns above variable costs.
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Example of a Whole Farm Budget
Ownership costs are the fixed costs for the whole farm The ownership or fixed csosts are included here. The cash overhead costs are ones that acutal dollars are spent during the year. The non-cash overhead costs are how to include some costs each year for long-term assests such as equipment and land that may have been purchased in a different year. Even if they were purchased this year only a portion should be included.
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Enterprise Budget The physical and financial planning for a specific enterprise (e.g., sheep, cattle, crops, etc.). Estimates the expenses and receipts for a set period of time under a set of production practices. An enterprise budget is similar to a whole farm budget but it is only for a single enterprise. There are various ways to define an enterprise. It could be a specific type of livestoct or a crop such as cattle or sheep. It could also be a combination of crops. For example, a vegetable farm selling directly to customers. It would include all of the receipts (sales or revenue) and expenses for a period of time usually a year.
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Basic Parts of an Enterprise Budget
A section of yield, price, and income A section containing variable costs A section of fixed/overhead costs An estimate of profit or net income per cow or some other variable.
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Enterprise Budget for 14' x 100' Tomato Bed
Example of an Enterprise Budget Enterprise Budget for 14' x 100' Tomato Bed Revenue Quantity Unit Price Total % of Revenue Product Individual product number sold size of unit price per unit Total revenue Tomatoes Average Price 450 lbs $ 1.50 $ 100% Total Revenue $ Expenses Materials $ Labor $ Marketing $ Ownership Expenses (Fixed Costs) $ Total Expenses $ 119% Net income before taxes (revenue minus expenses) $ (129.00) -19% Income and self employment taxes $ (19.35) -3% Net profit $ (109.65) -16% Revenue from an individual product is totaled on top. Expenses for the individual product are broken down into different sections. Variable expenses were broken down by Materials Needed Labor Marketing This is not the only way to lay out the variable expenses, as long as all expenses are included for the individual product.
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Enterprise Budget for 14' x 100' Tomato Bed
Example of an Enterprise Budget Enterprise Budget for 14' x 100' Tomato Bed Revenue Quantity Unit Price Total % of Revenue Product Individual product number sold size of unit price per unit Total revenue Tomatoes Average Price 450 lbs $ 1.50 $ 100% Total Revenue $ Expenses Materials $ Labor $ Marketing $ Ownership Expenses (Fixed Costs) $ Total Expenses $ 119% Net income before taxes (revenue minus expenses) $ (129.00) -19% Income and self employment taxes $ (19.35) -3% Net profit $ (109.65) -16% Ownership (fixed) expenses include any overhead expenses divided by the amount spent on the product, such as The depreciation of equipment The rent allotted to that specific amount of land Use an enterprise budget to see whether a profit can be made producing a new product. In this example there is no profit. It would be good to have a discussion of why you would bother with an enterprise budget. One main reason is that it is much more fun to lose money on paper than in real life. This gives them an opportunity to look at various combinations. Module 4 will use these enterprise budget examples and show how to do various types of financial analysis. But adjustments can be made on paper!!
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Ranch Operation Enterprise Budget
General Composite Ranch Total Per AUY INCOME Price Quantity Cwt Calves $85.00 231 5 $98,350 $266.16 Cull Cows $38.00 37 10 $14,042 Culls Bulls 1 15 $527 $1.43 Total Income $112,918 $306 EXPENSES Variable Costs Lease and Grazing Fees $8,510 $23 Feed $11,090 $30 Livestock Expenses $35,918 $97 Labor $12,169 $33 Total Variable Expenses $67,687 $183 Fixed Costs Average Fixed Costs Per AU Cash fixed (property tax & insurance) $40 14781 Depreciation Total Fixed Expenses $29,562 $80 Total Expenses $97,249 $263 Net Cash Return Over Variable Expenses $45,231 $122.41 Net Ranch Income $15,670 $42.41 This budget reflects a 370 head ranch with a 75% calving rate. Fixed costs have been broken down into Cash fixed expenses, which include but are not limited to taxes, insurance payments, water rights, and rent. Non-cash fixed expenses, including depreciation on equipment. Another good discussion is to ask participants what they can tell about an enterprise by looking at the budget. For example, they can tell if it is making money (has profit). They can see where money comes from and where it is being spent. On this budget a final column is added to look at all the amounts per cow or animal unit year. This could also be done per acre or some other unit.
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Ranch Operation Enterprise Budget General Composite Ranch
Total Income $112,918 $306 Total Variable Expenses $67,687 $183 Total Fixed Expenses $29,562 $80 Total Expenses $97,249 $263 Net Cash return over variable expenses $45,231 $122.41 Net Ranch Income $15,670 $42.41 Returns Per cow Per calf sold Per cwt Returns above variable costs $ 51,017 $ $ $ 44.09 Returns above Variable and Cash Fixed Costs $ 35,127 $ 95.06 $ $ 30.36 Returns above all costs $ 19,238 $ 52.06 $ 83.13 $ 16.63 This shows various ways that the amounts could be displayed per unit.
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Budget Summary The budget you will use depends on what you want to look at and what data you have available. You will need to make estimates, but over time find better information. Start simple and work up.
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Cash Flow Statements Cash Flow: Running cash balance of the cash inflow and outflow for a period. This is usually prepared annually, showing income, outflow, and cash available or needed for each month. Projected Cash Flow: Same as above, but completed at the start of the year to estimate the cash flow needs of the operation.
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Projected Cash Flow
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Why Cash Flow Analysis is Important
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Key Financial Statements
Balance Sheets Income Statements
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Why have Financial Statements
Am I really making money? Is my business growing? Is my wealth increasing? Do I have resources I can use to grow?
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Balance Sheet Assets - What I own (sheep, cattle, equipment, etc.)
Even if there is a lien against it Don’t count leased assets Liabilities - What I owe to others Include the amounts of any assets financed Wealth - How much equity I have Also called net worth statement
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A SAMPLE BALANCE SHEET I think that this slide needs some explanation.
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Also called Profit & Loss Statement
AN INCOME STATEMENT An accounting of income and expenses for a period of time for the purpose of calculating net income or net loss for the period Also called Profit & Loss Statement
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A SAMPLE INCOME STATEMENT
I think that this slide needs some explanation.
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A Few Key Ratios
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Know Where Your Business Stands
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Why Keep Records? Help you make decisions
You know where your business is Pay income taxes Apply for loans
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Record Keeping Options
On paper Excel Quicken Quickbooks
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Questions What type of information is needed?
How much information do you need and want for management purposes? Who is going to collect and develop the information?
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Thank You!
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