1. 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.

2. Session 5: Financial Management

3. Review Take Home Develop your Enterprise Budgets In AG PLAN Products
Services
Production systems
Customers

4. 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?

5. [Guest Speaker Details]

6. 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

7. 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?

9. 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.

10. 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?

11. 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

12. Record Keeping Allows You See Progress Toward Goals

13. 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

14. 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.”

15. 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)

16. 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

17. 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

18. 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

19. 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

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

21. 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

22. 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

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

24. 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

25. 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

26. Production Records

27. Harvest Records
Unit? lbs may need scale

28. 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

29. 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

30. Seed and Plant Records
Some varieties do better than others, keep track of production by variety to make decisions in the future

31. Tracking Expenses
Types of expenses

32. 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

33. 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”

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

35. Record of Farm Expenses1 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

36. 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

37. Tracking Labor

38. 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

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

41. Financial Management

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

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

44. 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)

45. 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

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

47. 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

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

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

50. Ten Minute Break

51. In-Class Activity

52. 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.

53. 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 $2,500 $ 50,000
Timber: 20 $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

54. 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

55. Smith Balance Sheet
Working Capital (Current Assets – Current Liabilities)
$30,000 - $ = $29,863
Current Ratio (Current Assets ÷ Current Liabilities) $30,000 ÷ $ =
Debt-to-Equity Ratio (Total Liabilities ÷ Owner’s Equity) $10,000 ÷ $122, =
Equity-to-Asset Ratio (Owner’s Equity ÷ Total Assets) $122,863 ÷ $133, =

56. 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

57. Income Statement Case Study
Cash income from Egg Sales $625.00
Home value of eggs used (
Total income $632.50

58. Income Statement Case Study
EXPENSES Feed Purchased 1,750 $ Plus: Feed on hand at beginning of month 50 $0.25 +$ Less: Ending feed on Hand 300 $0.25 -$ Total feed expense $375 Other production expenses (feed supplements, bedding, cartons) -$100 Overhead Expense (utilities, promotion, depreciation) -$ 15 TOTAL EXPENSES $ NET FARM INCOME $142.50

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

60. Smiths Acres Income Statement
EXPENSES
Operating Expenses $21,421
Plus: Feed on hand at beginning of year 100 $0.25 $
Less: Ending feed on Hand 300 $0.25 $
Egg and strawberry cartons on Hand $
Adjusted Operating Expense $21,226
 Farm Interest Paid ,000
Depreciation ,180
TOTAL EXPENSES $ 26,406

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

62. Financial Statement Analysis

63. 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

64. 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

65. 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

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

67. 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?

68. Smith Acres Farm: Sample Cash Flow Projection for Strawberries*
See Handout: Strawberry Cash Flow Statement

69. 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.

70. 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

71. 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

72. 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

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

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

75. 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?

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

77. Evaluation
Add your evaluation link HERE

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