Farm Financial Record Keeping and Planning

Practical Farmers of Iowa 2017 Annual Conference

Jan. 20, 2017 12:30 – 2:00 pm

Ames, IA

What is a Small Potatoes?

• A Full-time farm, 13th season (Minburn)

• 10 Acres (~ 3 in production)

• Horticultural Crops

• Low input, system oriented, conservation minded, community involved, certified organic

• Relationship-based market (CSA), some wholesale

Stacy, Co-manager, Packing shed, Book keeper, Chef

Seasonal Full-time Employee w/Onion Crop

Rick, Production, Harvest, Mechanical

Ecological Systems Focused

Excellent Weed Control and Other Management Systems

Heavy Emphasis on Cover Crops and Fertility Management

Well-managed Crop Production

Focus on Food and Quality of Life

Community Supported and Enhanced

Why Have Any Record Keeping Systems?

•A successful farm is not possible without good record keeping.

•However, good record keeping does not guarantee a successful farm.

Because…

• To determine if you are meeting your goals.

• To make effective operating and management decisions.

• To comply with legal obligations (taxes, certification, worker’s compensation, …)

Why Set Up Any Record Keeping System?

• Resources – Tree and shrubs, plus improvements. Manure and cover crop. Baseline pollinators and other beneficials.

• Financial – Income, expenses, margin, ROE, …

• Quality of Life - Time for recreation, time spent cooking, amount of food preserved, aesthetics, …

• Other Financial – Enterprise profitability, comparison of markets, efficiency of labor, …

• Production and Other Systems - Productivity of planting, weeding, harvest, packaging, washing …

• Required – labor, payroll taxes, mileage, …

Important Record Keeping Systems at Small Potatoes

Focus on Financial Record Keeping.

Why?

Because …

The ability to support your household, maintain and improve your farm, interact positively with the community, improve

natural habitat, and all other goals of your farm plan depend on financial security and

stability.

Financial Record Keeping Foundation

Analysis

Farm Plan

Household Plan

(Book Keeping)

(Accounting)

Goals

Most financial records, their subsequent analysis and answers to new and existing questions begin with bookkeeping. A record of: 1) Revenue 2) Expenses Accounting comes later - the summary, analysis and reporting of those transactions.

Where do people fall short with bookkeeping?

1) Rely on memory. 2) Not prioritized. 3) Not faithful or complete. 4) Too complicated. 5) Not in a useful form.

What does a strong bookkeeping system look like?

1) Have systems in place where income and

expense data are faithfully and completely recorded.

2) Record data on a continuous basis. 3) Organize data so it can be usefully and easily

used – know what information you want. 4) Only collect and record data needed, or likely to

be needed. 5) Someone is responsible for each component of

record keeping.

Example at Small Potatoes – Data Used For:

1. Easily completing year-end and quarterly tax requirements.

2. Track expenses, by category, over time.

3. Comparing actuals with budget, mostly at year end.

4. Helping make market, equipment and labor decisions.

Recording sales (income).

Recording Sales - CSA System

At Small Potatoes, our primary sales are CSA shares.

• All CSA applications go into Rick’s

inbox.

• Rick notifies their application was received via email.

• Applications are then forwarded to the book keeper (Stacy’s inbox).

• All information is transcribed to an Excel Worksheet by delivery location (by Stacy).

• Physical applications are filed in a binder by location (by Stacy).

What does a strong bookkeeping system look like?

1) Have systems in place where income and

expense data are faithfully and completely recorded.

2) Record data on a continuous basis. 3) Organize data so it can be usefully and easily

used – know what information you want. 4) Only collect and record data needed, or likely to

be needed. 5) Someone is responsible for each component of

record keeping.

Recording Sales

This format tells us...

• Who has paid.

• How much they’ve paid and how

much they still owe.

• How many memberships are at each delivery location.

• How to contact the members quickly.

• Totals of shares – regular, extended, etc…

Excel Sheet of Members and Payments

Recording Other Sales - paper

• Non-CSA sales are invoiced (Rick).

• Invoices use a carbon copy system. (Yes, really.)

• Invoices are in chronologic and numeric order.

• Invoices never leave the binder.

• Binder never leaves its station.

• Invoices are bound annually and stored in designated file.

• Easily transferred to Excel.

Invoice Book and CSA Application Book

Invoices in numerical and chronologic order, CSA members tabbed by delivery location and alphabetized. Why?

?

Income Recorded and Organized

Recording

purchases (expenses).

Give me $15

What does a strong bookkeeping system look like?

1) Have systems in place where income and

expense data are faithfully and completely recorded.

2) Record data on a continuous basis. 3) Organize data so it can be usefully and easily

used – know what information you want. 4) Only collect and record data needed, or likely to

be needed. 5) Someone is responsible for each component of

record keeping.

Where Does Any Check or Receipt Go?

One physical location – ‘The Inbox’

• Simply put into Stacy’s inbox.

• Every sale and expense must be recorded,

SYSTEMATICALLY!

What does a strong bookkeeping system look like?

1) Have systems in place where income and

expense data are faithfully and completely recorded.

2) Record data on a continuous basis. 3) Organize data so it can be usefully and easily

used – know what information you want. 4) Only collect and record data needed, or likely to

be needed. 5) Someone is responsible for each component of

record keeping.

Stacy entering any receipts and payments (book keeping) into Quicken (Schedule F category) - weekly

Rick puts notes from on-line purchases and receipts from wallet into inbox . Notice the notes.

Stacy enters all receipts into Quicken w/ date, check number, schedule F category, notes and amount.

In moments a report can be created to show total category (seed) costs in any given time frame.

What does a strong bookkeeping system look like?

1) Have systems in place where income and

expense data are faithfully and completely recorded.

2) Record data on a continuous basis. 3) Organize data so it can be usefully and easily

used – know what information you want. 4) Only collect and record data needed, or likely to

be needed. 5) Someone is responsible for each component of

record keeping.

Done in 30 minutes! Thanks, Stacy!

Recording Expenses Remember

• All receipts and bills go to book keeper inbox.

• Keep a separate checkbook, credit card and bank account for farm and family (easy/fast income statement).

• Bills are recorded by Schedule F category electronically.

• Bills are recorded by Schedule F category physically.

Recording Purchases by Schedule F Category

Makes it very easy to track expenses by category, budget AND do your taxes.

When finished recording, Stacy files in an organized, retrievable manner.

Planning

• Comprehensive goals and plans - financial, production, resources, management, quality of life, environmental and social details - of how the farm operates.

• Financial portion includes planned farm income.

The Farm Plan

Goal Plan Evaluation

1. Put goals on paper.

2. Tie goals to plans.

3. Evaluate plans regularly.

Goal Plan Evaluation

• Put goals on paper.

• Tie goals to plans.

•Evaluate plans regularly.

Record Keeping

Record Keeping

Record Keeping

Record Keeping

Goal Plan Evaluation

Example of a goal? - Income

Plans?

Evaluation?

• Goal Income = $30,000

• Net Income $30,000

• Est. Expenses + $30,000

• --------------------------------------

• So, Revenue must be $60,000

Income and Expenses

If We Are Not Meeting Our Goal, Or Want to Improve Our Goal?

• Let’s say, we end up $25,000 in net income.

• How could we change our plans to increase income by $5,000?

If We Are Not Meeting Our Goal, Or Want to Improve Our Goal?

• Let’s say, we end up $25,000 in net income.

• How could we change our plans to increase income by $5,000?

• Perhaps increase production.

• Perhaps raise prices.

• Perhaps work harder.

• Perhaps lower costs.

• Perhaps more efficiency.

• Perhaps a new enterprise.

If We Are Not Meeting Our Goal, Or Want to Improve Our Goal?

• How could we change our plans to increase income by $5,000?

• Perhaps increase production.

• Perhaps raise prices.

• Perhaps work harder.

• Perhaps lower costs.

• Perhaps more efficiency.

• Perhaps a new enterprise. This can be very hard to determine.

And frustrating.

How might we alter our plan to meet our goal

• First, evaluate the strengths and weaknesses of your income stream. Also, determine what expenses are necessary and what are variable.

• Second, brainstorm possible plans to make up the shortfall.

• Third, determine what data is available to evaluate the ideas.

• Fourth, test against our planning criteria.

Record Keeping

Individual Goals/Plans Fall Into a Hierarchy of Decision Making

• Does it coincide with our mission and vision?

• Does it coincide with our whole farm goals – quality of life, type of production and future resource base?

• Does the action get to the root cause of the problem or a symptom?

• Is this the best use of energy and resources, will it provide sustained future income, does it provide the greatest return for effort spent?

Almost Done ……….

** Advice **

Your passion, the fashionability of local foods, and the admiration of professionals picking up your CSA box in their Volvo does not suspend the laws of mathematics.

** Advice **

Remember: • Basing your planning on economic goals

alone is dangerous and mechanistic

• They may lead to future and unseen costs

• Your answers may be misleading, …

Reductions in labor and knowledge lead to increased input, capital and technological dependence; pollutive, extractive, unpleasing and homogenous systems may result.

** Advice **

The Rules of Thumb

ROA of 15% is very good.

$30,000 income = $200,000 asset

40% margin is very very good.

$30,000 income = $75,000 revenue

Operating Margin = 27% ROA = 15%

** Advice **

Be Financially Cautious:

• Patience

• Delayed gratification

• Plans for necessary spending

** Advice **

The Magic Formula

A good stable business takes:

- Very hard work.

- Moderately smart work.

- Consistently good products and services.

- About 3-5 to become profitable, 8-10 years to become stable, self-functioning.

** Advice **

Be Advice Cautious:

• Work, learn and seek advise from someone doing what you want to do and who is doing it brilliantly.

Thanks