Estimating and Tracking Production Costs

SHANNON DILL , EXTENSION EDUCATORUNIVERSITY OF MARYLAND EXTENSION, TALBOT COUNTYSDILL@UMD.EDU410-822-1244

Good Manager

Good Production

Farm Profitability

Overview•Estimating Production Costs

•Creating Crop Budget

•Using Cash Flow

•Record Keeping

•Tracking the Costs

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

What are enterprise budgets?

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

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

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

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 -

EXAM

PLE

Iowa Vegetable Production Budgets https://store.extension.iastate.edu/Product/Iowa-Vegetable-Production-Budgets

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

•Labor – Keep a log of time. Assign a value to hourly rates

•Fuel – keep a log of fuel usage

Dealer 1 Dealer 2 Dealer 3

12 lbs $10.00 10 lbs $11.00 10lbs $7.50

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

Eggplant Exampleper pound in a 100x40 bed

Variable Costs per unit

$86.41/130lbs = $0.66For every pound grown it costs $.66 in variable costs

Fixed Costs per unit

$10.57/130lbs = $0.08For every pound grown it costs $.08 in fixed costs

Break even price

($86.41+$10.57)/130lbs = $0.75You must charge at least $0.75 to break even. At $.76 you begin your first profit

Break even output

($86.41+$10.57)/$1.40 = 69lbsYou must grow and sell 69 pounds of eggplant to break even. At 70 pounds you make your first profit.

Net incomeper unit

($182-$96.98)/130 = $0.65You make $.65 per pound of eggplant you sell

Financial Plan

Balance Sheet Income Statement Cash Flow

Financial Plan

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

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

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 TotalCash inflow1. Beginning cash balance 0 0 0 0 02. Crop sales 03. Livestock sales 04. Other farm income 05. Capital sales 06. Non-farm receipts 07. Total cash inflow (total 1 to 6) 0.00 0.00 0.00 0.00 0.00 0.00Cash outflow8. Chemicals 09. Custom hire 010. Feed purchased 011. Fertilizer and lime 012. Freight and trucking 013. Gasoline, fuel, and oil 014. Insurance 015. Labor hired 016. Rent or lease 017. Repairs and maintenance 018. Seeds and plants purchased 019. Supplies purchased 020. Taxes 021. Utilities 022. Vet., breeding, medicine 023. Other farm expenses 024. Capital purchases 025. Family living or withdrawals 026. Term loan payments 027 Total cash outflow (total 8 to 26) 0.00 0.00 0.00 0.00 0.00 0.00Cash flow summary28. Inflow minus outflow (lines 7-27) 0.00 0.00 0.00 0.00 0.00 0.0029. New borrowing: term30. New borrowing: credit line31. Credit line payments32. Ending cash balance (28+29+30-31) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00Comments:

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

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

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

Recordkeeping

Proof – The IRS may ask for revenue, expenses and inventory itemsDecision Aids – Records help with making decisions on purchases, enterprises etc.Institutional Requirements – Lending agencies, FSA, crop insurance require production and acreage reportsEnvironmental – 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!

Keeping Farm RecordsThree basic types of farm records:1. Resource inventories2. Production accounts or livestock and crop operations3. Income and expense records

Resource InventoriesCount and assign value to your resources to inventory your farmResources include:◦Assets: Items you own◦Liabilities: indicate what you owe

Income and Expense RecordsTransaction 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 Ledger1. Farm cash receipts2. Farm cash disbursement

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

Other types of records??•Household Budget

•Marketing, CSAs

•Organic •Food safety (GAP)

•Customers

•Vendors•Lease agreements

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

Organizing Financial Information•General ledger – Examples

•Computer systems• Microsoft Templates• Excel• Quicken • QuickBooks• APPs

Templates http://office.microsoft.com/en-us/templates/

Excel

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

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

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

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

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.

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!

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

HELP!!www.quickbooks.comHave a great support page

Check with your accountant –

they may have a QB Pro on staff