Estimating and Tracking Production Costs SHANNON DILL, EXTENSION EDUCATOR UNIVERSITY OF MARYLAND EXTENSION, TALBOT COUNTY

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1 Estimating and Tracking Production Costs SHANNON DILL, EXTENSION EDUCATOR UNIVERSITY OF MARYLAND EXTENSION, TALBOT COUNTY

2 Good Manager Farm Profitability Good Production

3 Overview Estimating Production Costs Creating Crop Budget Using Cash Flow Record Keeping Tracking the Costs

4 What are enterprise budgets? Enterprise budgets are a great way to estimate your production costs per crop An organized listing of your estimated gross income and costs which can be used to determine the expected net income for a particular enterprise Budget on a per unit basis ex 1 acre, 1 bushel, 1 ton, per 1,000 Square Foot Sections include Investment, Income, Expenses (variable and fixed), Profit

5 Estimating Production Costs Itemize the receipts (income) received for a crop Yield and Price List the inputs and production practices required by a crop Evaluate the efficiency of farm enterprises Estimate benefits and costs for major changes in production practices Not an exact science it is an estimate drought, disease etc

6 Budget Determine profitability of one enterprise versus another. Understand breakeven cost and pricing points for that enterprise Understand input structure such as labor inputs, chemical inputs, fixed equipment cost per dollar returned. Plan crop rotation schedules and product mix

7 What are enterprise budgets? Traditional Crops and Livestock Production Very detailed, more accurate Examples Field corn, soybeans, dairy, hay Specialty crops Less detailed, less accurate because of differences in regions and inputs Examples Organics, niche crops, rotational grazing, value added activities There are great templates out there but use them only as a guide

8 6 Parts of a Budget Investment/Establishment Gross Income Yield and Price Variable Costs Cost to Produce Fixed Costs Cost of Overhead Net Income - + or -

9 EXAMPLE Iowa Vegetable Production Budgets uct/iowa-vegetable-production-budgets

10 Variable Cost Estimations Seed, Feed, Fertilizer, Pesticide Prices will depend on plants per acre, varietal selections and quantity purchased Example Sweet Corn Costs Per Acre Seed Dealer 1 Dealer 2 Dealer 3 12 lbs $ lbs $ lbs $7.50 Labor Keep a log of time. Assign a value to hourly rates Fuel keep a log of fuel usage

11 Fixed Cost Estimations You are paying these now DIRTI (Depreciation, Insurance, Repairs, Taxes, Interest)

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13 Eggplant Example per pound in a 100x40 bed Variable Costs per unit Fixed Costs per unit Break even price Break even output Net income per unit $86.41/130lbs = $0.66 For every pound grown it costs $.66 in variable costs $10.57/130lbs = $0.08 For every pound grown it costs $.08 in fixed costs ($86.41+$10.57)/130lbs = $0.75 You must charge at least $0.75 to break even. At $.76 you begin your first profit ($86.41+$10.57)/$1.40 = 69lbs You must grow and sell 69 pounds of eggplant to break even. At 70 pounds you make your first profit. ($182-$96.98)/130 = $0.65 You make $.65 per pound of eggplant you sell

14 Financial Plan Balance Sheet Income Statement Cash Flow

15 Financial Plan Very important and necessary component of the business plan Balance Sheet Solvency Income Statement Profitability Cash Flow Liquidity Pro Forma Statements - projections

16 Cash Flow Summarizes all cash in-flows and out-flows for a period of time Checkbook Accounting In-Flows product sales, receipts, sale of capital assets, borrowed money Out-Flows production, capital expenditures, loan payments, living expenses Important because of seasonality. It will help you plan your income and expenses over a year. Does not take inventory or depreciation into account Projected and Actual Cash Flow do this each year

17 Cash Flow Budget Name> Year 1 or Year 2 or Year 3 or Year 4 or Last year 1st quarter 2nd quarter 3rd quarter 4th quarter Total Cash inflow 1. Beginning cash balance Crop sales 0 3. Livestock sales 0 4. Other farm income 0 5. Capital sales 0 6. Non-farm receipts 0 7. Total cash inflow (total 1 to 6) Cash outflow 8. Chemicals 0 9. Custom hire Feed purchased Fertilizer and lime Freight and trucking Gasoline, fuel, and oil Insurance Labor hired Rent or lease Repairs and maintenance Seeds and plants purchased Supplies purchased Taxes Utilities Vet., breeding, medicine Other farm expenses Capital purchases Family living or withdrawals Term loan payments 0 27 Total cash outflow (total 8 to 26) Cash flow summary 28. Inflow minus outflow (lines 7-27) New borrowing: term 30. New borrowing: credit line 31. Credit line payments 32. Ending cash balance ( ) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Comme nts:

18 Tracking Enterprise Costs It is important to know the cost of each enterprise you have Keep detailed records on activities for each enterprise Include variable inputs Include machinery time and labor Make it manageable This can easily be tracked in record keeping software Could be excel, quickbooks or other systems

19 Farmers Need to... Manage their business Plan for profit: monthly profit/loss statements compare year to date profit/loss monitor key expenses closely (i.e. feed. inputs) monitor enterprise income/expenses set annual budgets look at financial statements Pay down debts Communicate with lenders/investors Communicate with spouse/partners Have a household budget

20 Farmers Manage Cash, Capital and People Accounts payable (what you owe others) Account receivable (what others owe you) Cash flow (what s in the bank) Structured debt (bank notes and loans) Payroll

21 Recordkeeping Proof The IRS may ask for revenue, expenses and inventory items Decision Aids Records help with making decisions on purchases, enterprises etc. Institutional Requirements Lending agencies, FSA, crop insurance require production and acreage reports Environmental Nutrient management, pesticides, bio-solids, irrigation all require records. Good records do not ensure your farm will be successful; however, success is unlikely without them!

22 Keeping Farm Records Three basic types of farm records: 1. Resource inventories 2. Production accounts or livestock and crop operations 3. Income and expense records

23 Resource Inventories Count and assign value to your resources to inventory your farm Resources include: Assets: Items you own Liabilities: indicate what you owe

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28 Income and Expense Records Transaction Journal (farm checkbook) Includes: Date, check receipt number, amount of check or deposit, and the payee or income source use a memo so you know important info General Ledger 1. Farm cash receipts 2. Farm cash disbursement

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30 Summary of Records Household Budget Enterprise Budgets Balance Sheet Cash Flow Projected Actual Production Schedule Production Records Seed, Fertilizer, Pesticide, etc Yield records for FSA, Crop Insurance Sale Records

31 Other types of records?? Household Budget Marketing, CSAs Organic Food safety (GAP) Customers Vendors Lease agreements

32 Tracking Income and Expenses Account Methods Cash Method - record expenses in financial accounts when the cash is actually laid out, and they book revenue when they actually hold the cash (most popular for farms) Accrual Method - it records revenue/expenses when the actual transaction is completed not when it receives the cash

33 Organizing Financial Information General ledger Examples Computer systems Microsoft Templates Excel Quicken QuickBooks APPs

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37 Advantages of QuickBooks Ease of use Will write checks Manages accounts payable/receivable Has QuickPay Has payroll features Easy to reconcile & produce reports Enterprise accounting Generates financial statements Creates invoices Maintains list of vendors and customers Cash or Accrual Accounting Manages lines of credit and credit cards An many more

38 Other Advanced Features Enterprise accounting Raising and selling feed Financial forms and estimated cash flow Tax records Financial ratios

39 Steps in Using QuickBooks Install and create a company file Decide on a start date Review chart of accounts and modify for your farm business Set up liability and fixed asset accounts Create January account balances Start entering checks and deposit sales Start enterprise accounting Organize financial statements

40 What you need to get started Reconcile all bank accounts to your QuickBooks start date Current bank statement Cash balances Create a detailed list (date, payee and amount) of transactions that have not cleared your bank Complete a physical inventory and gather inventory information as well as fixed asset information and credit card information

41 Tips Purchase the physical product don t download from Intuit Look at your previous year's tax return to get information on depreciation amounts. Have an accountant look over your QuickBooks setup after you gather all required information but before you make any entries. Omissions and/or incorrect entries can haunt you for a long time. For fixed assets, such as property and equipment, you must know the current value and accumulated depreciation. Pay any unpaid payroll withholding amounts before your QuickBooks start date to avoid having to enter them as an open liability. You will need the current balance of all loans and mortgages.

42 Tips RECONCILE monthly with your bank statement Print a copy of your Chart of Accounts for reference Be sure back up your accounts on flash drive or CD and store in a safe location Consider having a separate computer for financials and business than a household computer especially if you have teens in the household. Save time - Print checks!

43 Which is Right for you? There is a variety of products available depending on your platform and business needs

44 HELP!! Have a great support page Check with your accountant they may have a QB Pro on staff

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