Know your Costs and Price for Profit
Price is the dollar amount that you ask for sales of a product or a service. It is one of the four P’s of Marketing: Price, Product, Placement, and Promotion. Price is critically important to the profit on the farm, but the other P’s of marketing contribute substantially to the price that you can get. Profit is the 5th P that keeps you in business. There are various costs that go into deciding what price you will charge for your product.
1) Start with the input costs = Variable Costs (VC) i.e. fertilizer, seed, gas, labor
If you don’t cover these you will have to shut down in a short amount of time.
2) Add in ownership costs = Fixed Costs (FC) i.e. depreciation, interest, repairs, taxes, insurance
If you cover these you will meet your breakeven cost to the business, but have nothing left for yourself. Every item should contribute to ownership costs. If you don’t cover ownership costs, you will have to shut down in a longer amount of time.
3) Add in a return to you = Profitable Price - this is the price you need to survive in the long run.
Allocate Expenses by Enterprise
To track labor and equipment costs by product requires excellent records. You can keep track of tasks and expenses such as plowing time and fertilizer for the whole farm and allocate by square feet used by a particular product. Keep track of daily time spent for special efforts or expenses required by specific products such as transplanting separately. Add all of these together to determine costs per product. Be sure to keep track of harvestable yields or the amount of product that was actually sold, as this impacts the price per unit significantly.
Value vs. Price
Many direct market farmers are afraid to charge what they need to in order to have some profit for themselves. You are providing more value to the buyer as you are closer to the customer. Ask yourself who are your competitors? Do you want to be a ‘setter’ or a ‘taker’?
Value = Quality + Service + Price
- Your buyers want a quality product that you can provide because you can grow varieties for flavor instead of travel characteristics.
- Your buyers want to know how their food was grown. They like the fact that they have a relationship with you. This takes time on your part, but they are willing to pay for it.
- You can introduce them to new products and ways to cook specialty items. This is education that they are willing to pay for.
- Fresh un-waxed products, less fuel used, and community support are also cited as reasons many consumers are willing to pay more for local products.
- You can charge more for early season products when customers are eager to taste the first fresh local strawberries or sweet corn, so strive for early sales.
Calculations for Determining Price
Cost and Profit Method
Add your variable cost + your fixed costs + profit needed for the particular product = Income
Divide by number of units produced = price/unit
If it costs you $3,000 total variable costs and $2,000 total fixed costs and you want $2,000 of profit for a specific product then your total income from that product needs to be $7,000.
Divide this by the number of units produced, and you will have the price per unit.
$7,000 / 950 units = $7.38/unit
Gross Margin Method
This method derives from the whole business sales, costs, and planned profit. This method is usually used by retail businesses that resell products. An example of gross margin method in a vegetable business might be:
Know your total expected vegetable sales = $10,000
Know your total fixed costs + desired profit = $3,000 – this is the gross margin needed.
Divide your gross margin by total sales: $3,000/$10,000 = 30%
Know your unit variable cost = $5.00
You divide the unit price by 1- 30% of the unit variable cost to determine the price
$5.00 / (1-30%) = $5.00 / .7 = $7.14 per unit
Plan for Profit – Don’t Drop Prices
What if you have corn at $3.50/dozen according to your calculations and your neighbor has $3.00/dozen? Can you still make a profit by lowering your price? Sometimes it is better to sell fewer at the higher price than sell more at the lower price. For example, if your margin on the $3.50 is $0.50 toward profit. If you sell 300 dozen that will give you $150 in profit. You would have to sell 600 dozen if you sold at $3.25 to get the same profit. For a 7% decrease in price you have to sell twice as much product.
Do not price your farm product below the market just because the farm income is inconsequential for you. For example, you may be able to afford to sell a dozen fresh brown eggs for $1.00, but other local farmers who rely on farm income for their families cannot – they might need the full price of $3.00 a dozen to cover their expenses and do not have the off-farm income you do. They could lose sales unfairly due to your indiscretion. In the interest of cooperating fully with your local farm community, keep your prices in line with market rates for any farm product, even if you can afford not to.
Going Rate for Market Area
Many beginning farmers start out with a pricing strategy that reflects what everyone else is charging. While this is a good place to begin, it is not where you want to be forever. It is important to know your costs and price for profit.
Article 25-AA of Agriculture and Markets Law authorizes the creation of local agricultural districts pursuant to landowner initiative, preliminary county review, state certification, and county adoption. Most counties have placed agricultural land in state certified agricultural districts. While they are county-created and state-certified, towns have no authority over agricultural districts. Agricultural districts are not to be confused with agricultural zoning that may exist in some towns.
The purpose of agricultural districts is to encourage the continued use of farmland for agricultural production. The program is based on a combination of landowner incentives and protections, all of which are designed to forestall the conversion of farmland to non-agricultural uses. Included in these benefits are preferential real property tax treatment (agricultural assessment and special benefit assessment), protection against overly restrictive local laws, government-funded acquisition or construction projects, and private nuisance suits involving agricultural practices.
Agricultural Assessment: provides the opportunity for farmland owners to receive real property assessments based on the value of their land for agricultural production rather than its development value. (See the Agricultural Assessment Fact Sheet #21 for information).
Notice of Intent: mandates state agencies, local governments, and public benefit corporations to avoid or minimize adverse impacts to farm operations in pursuing projects within an agricultural district which involve the acquisition of farmland or the advance of public funds for certain construction activities. Division staff conducts detailed reviews of projects and recommends actions to mitigate. Projects cannot proceed until the notice process is completed.
Restrictive Local Laws: protects farmers in ag districts against local laws that unreasonably restrict farm operations. Division staff reviews both existing and proposed laws to determine if they are compatible with farm operations. If a local law is determined to be unreasonable, staff works with local government to develop mutually accepted modifications. If a local government is unwilling to modify a restrictive law, the Department is authorized to take action to compel compliance with Ag District Law. Requests for review must be provided in writing.
Right to Farm: authorizes the Commissioner to issue opinions, upon request, concerning the soundness of specific agricultural practices. If the Commissioner determines that a practice is sound, it shall not constitute a private nuisance. This protects farmers in cases where neighbors or others complain about farming activities.
Agricultural Enterprise Determinations: the Commissioner is authorized to issue an opinion on whether particular land uses are agricultural in nature. This provision helps determine if the agricultural district law is applicable to a particular farming enterprise that may be questioned by local authorities or others.
Real Estate Disclosure: requires that a disclosure statement be provided at the time of real estate closing that states if the property is in an agricultural district. This notifies the new landowner that agricultural activities are to be expected.
A copy of the full text of the NYS Agricultural District Law can be found at: http://codes.lp.findlaw.com/nycode/AGM/25-AA or call 518-457-7076.
Employee or Independent Contractor
Hiring labor in the State of New York imposes high liabilities and paperwork burdens on the employer. Because of this, employers may be tempted to classify their workers as independent contractors, but a person is only an independent contractor when they are legitimately an individual in business for themselves and for hire to the general public. If there is any ambiguity on the status of the individual, courts generally interpret the individual as being a worker.
If you would like a decision on if the individual is a worker or an independent contractor, file IRS form SS-8 Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. www.irs.gov/pub/irs-pdf/fss8.pdf
I-9 (http://www.uscis.gov/i-9) – Employers must keep an I-9 form from the US Citizenship and Immigration Service on file for all employees. The I-9 requires copies of documentation (a drivers license and social security card for most), however, the employer is not required to verify that these documents are valid.
Given the complexities and liabilities of properly administering payroll, it is recommended that small employers hire a payroll service from a local accounting firm. Though expensive, this frees the employer from the liabilities of missing a form deadline, improperly handling a payroll withholding account, and avoids the need to stay current with the various labor forms and regulations at both the state and federal level.
IRS Publication 51, Agricultural Employers Tax Guide (www.irs.gov/pub/irs-pdf/p51.pdf) – Reference publication explaining federal regulations and contains a calendar of when forms need to be filed throughout the year.
NYS Publication 50, Employers Guide to Unemployment Insurance, Wage Reporting, and Withholding Tax (http://www.tax.ny.gov/pdf/publications/withholding/nys50.pdf) – State Reference Publication.
Agricultural Employer’s Checklist 2014 (http://blogs.cornell.edu/smallfarms/files/2014/08/2014-Employer-Checklist-2dazazm.pdf) – Publication by Anita Deming which goes through the employee hiring process step by step.
Which Forms to File
Which specific forms your farm is required to file depends upon the farm size and the specifics of your operation. It is recommended that you seek the advice of a payroll specialist and read the two reference publications listed above to determine which forms are required for your operation.
If you decide to do payroll on your own, a list of forms you should become familiar with follows.
This is by no means a comprehensive list of the forms your operation needs to be compliant.
- Form SS-4 Application for Employer Identification Number (EIN) (www.irs.gov/pub/irs-pdf/fss4.pdf) – Your business must obtain an EIN if you have employees or will file for other taxes such as excise taxes.
- Form NYS-100 New York State Employer Registration for Unemployment Insurance, Withholding, and Wage Reporting (http://www.labor.ny.gov/formsdocs/ui/nys100.pdf) – To be filed when you become an employer. You will be assigned an Employer Registration Number, which is separate from your federal EIN.
- W-2 (www.irs.gov/pub/irs-pdf/fw2.pdf) – Form stating wages and withholdings made for an employee throughout the year. A copy is sent to the employee, the Social Security Administration, the IRS, the NYS Department of Taxation, and to county/local governments that have an income tax such as New York City.
- W-3 (www.irs.gov/pub/irs-pdf/fw3.pdf) – Similar to the W-2, filed with the Social Security Administration
- W-4 (www.irs.gov/pub/irs-pdf/fw4.pdf) – Form filled out when an employee starts so that their employer knows to withhold the correct amount of taxes.
- Form NYS-45 Quarterly Combined Withholding, Wage Reporting, and Unemployment Insurance Return (http://www.tax.ny.gov/pdf/current_forms/wt/nys45_fill_in.pdf) – State form to be filed quarterly.
- Form 940 Employer’s Annual Federal Unemployment (FUTA) Tax Return (www.irs.gov/pub/irs-pdf/f940.pdf) - Required if you had cash wages greater than $20,000 or employed 10 or more workers throughout the day for 20 or more weeks in the year.
- Form 941 Employers Quarterly Federal Tax Return (www.irs.gov/pub/irs-pdf/f941.pdf) – Required to report wages paid, tips received, federal taxes withheld, Social Security and Medicare withholding, and advance EIC payments for non-farm workers.
- Form 943 Employers Annual Federal Tax Return for Agricultural Employees (http://www.irs.gov/pub/irs-pdf/f943x.pdf) – Form 941 for farms.
- Form 1099 (instructions www.irs.gov/pub/irs-pdf/i1099msc.pdf) – Must be furnished to people who received $600 or more in non-employee compensation throughout the year.
- Form 945 Annual Return of Withheld Federal Income Tax (http://www.irs.gov/pub/irs-pdf/f945x.pdf) – Used to report income tax withheld for non-payroll wages.
- Form 4029 Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefit (www.irs.gov/pub/irs-pdf/f4029.pdf) – Certain members of religious organizations (generally Amish or Mennonite in agriculture) may file this form to exempt themselves (and their employer) from Social Security and Medicare taxes.
Workers’ Compensation Insurance
Employers are required to have workers’ compensation insurance on their workers if cash wages exceeded $1,200 in the preceding year. Coverage must be obtained effective April 1st of the year immediately following the year where the farm had $1,200 of payroll. If you host unpaid interns and apprentices on your farm, they must also be covered by workers’ comp (the training and/or room and board you provide them is valued in lieu of wages). The only exception to this is if your farm is a 501(c)3 non-profit organization. To learn more, download the Employers’ Handbook: http://www.goer.ny.gov/Employee_Resources/employee_handbook/2011Employee_Handbook.pdf.
Insurance can be purchased from the New York State Insurance Fund (http://ww3.nysif.com/), private insurers, or an employer can form/join a self-insurance group if they meet various requirements and post bond.
State law requires that employees be covered by a disability benefit if they are disabled off the job. Most workers compensation insurance will also include this. Family members (spouse or child) and farm laborers are exempt from this requirement. Farm corporate officers and office workers need disability benefits coverage. If the farm is held as a corporation or LLC then the family member exemption does not apply because no one is related to a business entity.
As of the revision date noted on this fact sheet, the Federal Minimum Wage is $7.25/hr. The New York State Minimum Wage is $8.00/hr, increasing to $8.75/hr by 2015 and $9.00/hr by 2016. This wage minimum applies to regular wage jobs and piece-rate jobs on farms with annual payroll over $3,000. It excludes immediate family and minors under 17 years of age employed on the same farm as their parents or guardians who are paid on a piece-rate basis at the same rate as employees over 17.
The wage order permits deductions for meals and lodging supplied by an employer, except for lodging for seasonal migrant workers. Payments in kind may be permitted at not more than the farm market value.
Employers must post a summary of the wage order in a conspicuous place in their establishment, along with a copy of the general work agreement.
Note that farmers have a lot of liability in this area: if an underpaid apprentice complains to the Labor Department, the farmer may have to pay the back pay plus interest and fines to the state.
Youth Rate Certificate for Farm Work
In agriculture you can legally pay children under the age of 16 (with a permit and other criteria satisfied) a minimum of $3.20/hr for their first season of harvest; several other minimums apply depending on the work. You must file a Youth Rate Certificate (http://www.labor.state.ny.us/workerprotection/laborstandards/PDFs/LS415_1.PDF) to hire youth for less than minimum wage.
If you employ your own minor age children on the farm, they are exempt from all minimum wage regulation, meaning that they can be paid any wage. This only applies to your own children; nieces/nephews or other minor age family members are subject to state wage laws.
Youth Labor (excluding your own children)
You may not hire anyone 11 years or younger in New York State. 12- and 13-year-olds may work in harvest operations if they have Permit AT-25 and are accompanied by a parent during certain times of the day and year. 14- and 15-year-olds may work on farms with Permit AT-24 during non-school hours. Permits and working papers may be obtained from school offices. Farm workers under 16 are prohibited from performing farm tasks involving power machinery. 16- and 17-year-olds may work on farms without permits or working papers.
Under NYS Child Labor law, 14 & 15 year-olds are allowed to work 18 hrs/week when school is in session and 40 hrs/week when school is not in session. 16 & 17 year-olds are allowed to work 28 hrs/week when school is in session and 48 hrs/week when school is not in session.
Contact your local NYS Department of Labor Office for more details: www.labor.state.ny.us/.
Migrant Workers (Workers who do not have a permanent residence in New York State)
A farmer or processor who uses the services of a farm labor contractor or crew leader must verify that that person has a Farm Labor Contractor Certificate of Registration issued by the New York State Department of Labor.
Growers and processors who bring in five or more workers from out of state must obtain a Migrant Labor Registration Certificate (www.labor.state.ny.us/formsdocs/wp/ls113.pdf) and report wages, housing, and working condition to the state. If you plan to house five or more workers you must obtain a farm labor camp permit from the State Department of Labor (www.labor.state.ny.us/formsdocs/wp/ls113.1.pdf).
Workers must be given written notice of wages, nature of work, period of employment, transportation, housing, benefits, and more. Several Spanish/English work forms are available at http://www.labor.ny.gov/formsdocs/wp/ellsformsandpublications.shtm#Farm_Labor
For more information contact: NYS Dept. of Labor, 518-457-9000, www.labor.state.ny.us or extension agent Thomas Maloney, 607-255-1628, firstname.lastname@example.org.
You can also purchase the NY Farm Bureau’s Guide to Labor and Employment Laws for $75, or $40 for members, at http://www.nyfb.org/img/uploads/file/Legal_Guides_Flyer_3_.pdf.
Farm operations are exempt from paying sales tax on items used in the farming operation. None of the exemptions are automatic. You must either present an exemption certificate to the vendor when purchasing products or you can claim a refund if you have evidence to show you paid the sales tax. Forms are available on the State Dept. of Taxation and Finance website listed below.
Some of the more common forms applicable to farms include:
ST-125 Farmer’s and Commercial Horse Boarding Operator’s Exemption Certificate
- Exempts you from paying sales tax on the purchase of tangible personal property used predominantly (more than 50%) in farm production or horse boarding; includes: building materials, production equipment and supplies, animals, feed, hardware, motor vehicles, fuel (not motor fuel), gas/propane, electricity, refrigeration. Also applies to labor and services hired for repairing, maintaining or servicing property used in farming.
- There are many subtle exemptions so it pays to check with the State if you are uncertain about whether an item or service you are purchasing is exempt from sales tax (and if the seller is unsure). Phone assistance is available by calling 800-972-1233 – website: http://www.tax.ny.gov/.
- Copies of this form are available on the website above or by calling your county extension office. Make sure you have copies of the form (ST-125) with you when making purchases. If you make numerous purchases with a particular supplier, check the box “blanket certificate” and the vendor can keep the form on file for future purchases. Page 2 of the form gives the tax department definitions of Farm Production, Farming, Predominantly, and Commercial Horse Boarding Operation.
PR-955 Claim for Refund by Farmers and Commercial Horse Boarding Operators – Sales Tax on Utilities, Fuel Oil and Motor Fuel (not for motor fuel tax)- www.tax.ny.gov/pdf/memos/sales/m00_8s.pdf
- This form may be used to claim a refund if you have paid sales tax on any of the above items. You do not have to fill out this form if you have an exemption certificate on file with the vendor. You must have receipts to justify this claim. File annually or semi-annually.
FT-1004 Certificate for Purchases of Diesel Motor Fuel or Residual Petroleum Product for Farmers and Commercial Horse Boarding Operations- http://www.tax.ny.gov/pdf/current_forms/motor/ft1004.pdf
- Exempts you from paying sales tax on diesel motor fuel used for faming purposes. Dealers can keep this form on file (check blanket certificate) so you do not have to fill out a new form for each new purchase.
FT-500 Application for Refund of Sales Tax Paid on Automotive Fuels
- Need to submit invoices with the refund application.
DTF-803 Claim for Sales and Use Tax Exemption -Title/Registration Motor Vehicle, Trailer, ATV, Boat, Snowmobile
- This form is not used to make purchases. Restricted to transactions processed by DMV. Motor vehicles must be predominantly used in farming.
ST-126 Exemption Certificate for Purchase of Racehorses
www.tax.ny.gov/pdf/current_forms/st/st126.pdf – Need a certificate for each horse.
Need Tax Help? Telephone Assistance from NYS Dept. Taxation and Finance is available Monday-Friday, 8:30 AM-4:25 PM
Business Tax Information: 518-457-5735
Federal Income Tax
Schedule C or F
When you sell livestock, produce, grains, or other products, the entire amount you receive and the costs associated with its purchase and production should be reported on a Schedule F income tax form.
If your business activities were non-agricultural, they must be reported on a Schedule C. An example of non-agricultural business would be a produce retailer who purchased wholesale and sold retail and did not grow anything. If your farm has a sub-enterprise like a gift shop, restaurant, or bed & breakfast then the income and costs associated with that activity would have to be reported on a Schedule C.
It is generally advantageous to report farm income and expenses on a Schedule F because farms are allowed to use cash accounting and most other businesses are required to use accrual accounting. In cash accounting you report the income and expenses as they are actually received or paid and in accrual accounting you report the income and expenses at the time they occur.
Example: you spend $5,000 in 2006 to fill the fuel tanks at your farm and at the end of the year the tanks still have $3,000 of fuel in them. In cash accounting, you report a $5,000 expense on your 2006 income tax return and in accrual accounting you can only report a $2,000 expense. If you did not have the cash to pay the $5,000 bill, you will not be able to report any expense on your tax return using the cash method but you would still be able to report a $2,000 expense on your income taxes using the accrual method if you did not pay the bill.
For detailed information on filing Farm Income Taxes, get a copy of IRS Publication 225 Farmers Tax Guide – www.irs.gov/pub/irs-pdf/p225.pdf
Depreciation is the depleted value of an asset with an expected useful life of more than one year.
Example: you purchase a tractor for $50,000. You cannot report a $50,000 tractor expense on your tax return; you must spread that $50,000 cost over 3-4 years.
The number of years that you must take to depreciate an asset and how you can claim in those years (e.g. straight line, accelerated, section 179, etc.) depends on the asset class of the property in question and the characteristics of the farm.
If the asset is not held for more than one year, it cannot be depreciated. Buildings can be depreciated but land cannot. The only instance when land can be depreciated is if it is logged or mined and it can be proven that the asset value has been depleted.
IRS Publication 225 Farmers Tax Guide (above) goes into detail on how to depreciate common farm property.
When a business asset is sold, it should generally not be listed as farm income and should be listed as a capital gain. Most capital gains tax rates are lower than income tax rates.
Example: you purchase a tractor for $50,000, depreciate it to a value of $0 over 4 years, and sell it for $20,000 in year 5. The $20,000 received is considered a capital gain.
New York State Income Tax
Farmers filing schedule F or C federal forms should transfer the information to NYS Form IT 201 if filing an individual return. Information from federal corporate tax returns should be transferred to the appropriate NY form. One NY Income Tax provision available to qualifying NY farm businesses is the Farmers’ School Tax Credit that is explained below.
Farmers’ School Tax Credit
The Farmers’ School Tax Credit allows an eligible farmer to receive a tax credit on their State Income Tax equal to 100% of the school taxes paid on the first 350 acres of property and 50% of the school taxes paid on the amount of acres beyond 350.
Example: A qualified 350-acre farm owes $2,000 in State income taxes and paid $3,500 in school taxes for the farm. They would be able to take a credit of $3,500, which is greater than the $2,000 owed, so they would not owe any State income taxes this year.
To qualify, two-thirds of your eligible gross income must be profit from farming for the past three years.
You can take a 100% school tax credit on the first 350 acres of agricultural lands owned and a credit equal to 50% of school taxes paid on the remaining land.
Woodlands used for pasture, erosion control, or windbreaks may qualify for the credit.
You can apply for 100% of the credit if your taxable income is under $200,000 and you can apply for a percentage of the credit if your taxable income is between $200,000-$300,000.
Farms held as a corporation or LLC can apply for the credit.
Unused credits cannot be redeemed for cash and cannot be applied to next year’s taxes.
Form to use to Claim this Credit: IT 217-I for individual filers; CT 47 for corporations
New York Farm Bureau Farmers’ School Tax Credit Fact Sheet http://126.96.36.199/www-nyfb-org/img/document_files/Farmers’ school tax.pdf
New York State Department of Taxation and Finance Publication 51: Questions and Answers on New York State’s Farmers’ School Tax Credit http://www.tax.ny.gov/pdf/publications/multi/pub51.pdf. Or call 1-800-462-8100 with questions and for publications and forms.
This fact sheet is part of the Guide to Farming in NY by Monika Roth et al, published by the Cornell Small Farms Program and Cornell Cooperative Extension. Fact sheets are updated once annually, so information may have changed since last revision. If you are reading a printed version of a fact sheet, compare revision date with online fact sheet publish dates to make sure you have the latest version.
Record Keeping is Good Business
At a minimum your farm will need a record keeping system for tax and legal compliance and it is highly recommended that you also keep yield and other farm production records that might be useful to making decisions on the farm. For example many growers keep weather logs so that they can evaluate their practices and yields and then make better growing practice and crop variety decisions for the coming year. You also might consider creating columns or break outs for your most expensive or profitable enterprises to keep track of profits, and doing an hourly break down periodically to see how much time you or your employees are using on particular enterprises. Many tools are available as part of the Improving Profitability tutorial on the Northeast Beginning Farmer website: https://nebeginningfarmers.org/farmers/achieving-profitability/profitability-tutorial/ .
Small farms and many businesses just starting out use the shoebox method of accounting. Keep all sales receipts in one folder, expense receipts in another, maintain a capital asset depreciation log, and you may have additional folders for farm yield or other data important to the year. The advantage of this system is that it is simple and easy to do. The disadvantage is that the data is not well organized so when you need farm information you often have to sort through piles of paper and do all computations by hand.
Cornell Farm Account Book
Cornell and many accounting services have pre-formatted account books with categories common to agriculture and additional areas for yield and capital asset data. These are typically of nominal cost ($10-$20).
The advantage of the farm account book is that it is easy to understand and the information is well laid out in case you need to access it later. The disadvantage is that the information may not be laid out how you as a manager would like it, and it is still a hand-entry accounting system so entering farm information may take several hours per week. To order the Cornell Farm Account Book ($20) or the Cornell Classic Farm Account Book ($15) from CUP Services, a division of Cornell University Press, write P.O. Box 6525 Ithaca NY 14850, call 800-666-2211, or e-mail email@example.com.
If you can use a basic spreadsheet in Excel or a similar program, this is a good compromise between paper systems and more sophisticated recordkeeping programs. Many new farmers start out with a simple spreadsheet like this one from Cornell (.XLS), which is intended for high tunnel crop producers but can be adapted for any operation. If you don’t need to generate invoices and have a relatively simple, small operation, a spreadsheet like this may serve your needs well for many years.
The most common software program for financial management is Quick Books; however, there are more expensive industry-specific programs specifically designed for dairy farms or wineries, for example. (Try searching online for “winery financial management software.”) If you are intimidated by QuickBooks, try their SimpleStart program from Intuit (search for this online). It’s free and is a good way to ease into using QuickBooks. If you are ready to upgrade at any point, you’ll be able to transfer your records seamlessly into the full QuickBooks program. Check out your local credit unions, banks, and Cooperative Extension to find out if they offer any QuickBooks trainings.
Farm Records Service
Some farmers choose to mail all invoices to an accounting service where the accountant will enter the information into a computer records system, provide you with detailed monthly business statements, and perform all tax functions. Farm Credit East at www.farmcrediteast.com/ is one company that provides these services.
The advantage of this system is that it provides a person who does not have the time, understanding of accounting, or computer skills the highest level of records information. The disadvantage is that this system has the highest cost and the monthly business statements take a few weeks to process and get back whereas the person utilizing an on-farm computer records system will have those statements in real time.
This fact sheet is part of the Guide to Farming in NY by Monika Roth et al, published by the Cornell Small Farms Program and Cornell Cooperative Extension. Fact sheets are updated once annually, so information may have changed since last revision. If you are reading a printed version of a fact sheet, compare revision date with online fact sheet publish dates to make sure you have the latest version.
How Will You Know if Your Operation is Making Money?
Cash Flow, Net Worth and Profit – These are the three pillars that sustain a business, and all you need for a business to thrive in the long run.
Cash Flow tracks the cash dollars into and out of the farm business. You should be able to balance all of the money that came in and went out:
Start up money + Cash from operations + Borrowed money =
Cash paid on expenses + Debt payments + End of year money.
In horticultural operations, cash flow expenses will be high in the spring as crops are planted and income will be high in the fall when crops are sold. Therefore, cash flow requires planning and savings to be sure income covers future costs. Cash flow records are a way to keep track of your money, ensure that you can cover monthly expenses, and are crucial to long term profitability
Net Worth tracks your investments in the farm. It is also called the Balance Sheet.
Net Worth = everything the business OWNS minus everything it OWES
Assets You Manage – What you Owe = Your Ownership
Assets – Liability = Equity
Some assets tend to go up in value over time such as land. This is called appreciation.
Some assets go down in value over time, such as equipment. This is called depreciation. Depreciation is a measure of the wear, tear, and obsolescence of an investment.
The primary function of net worth calculations is to measure the risk-bearing ability or financial solvency of your business or, in simple terms, how much you really own versus how much the bank owns.
Profitability is measured with the Income Statement. It is the result of your operation’s work, decisions, and return on investment.
Value of Production – Cost of Production = Profit
Profitability is harder to track as it blends cash flow and investment decisions. It also makes adjustments for family withdrawals, “free or family” labor, and return on investment.
Some examples of Good Cash Flow, but Low Profitability:
- Living off of inventories or depreciation, and not reinvesting in the operation
- Outside income or off farm jobs that help reduce need for family living withdrawals
- Borrowing money
- Not paying bills
Some examples of Bad Cash Flow, but Good Profitability:
- An expanding business with increasing assets, but few cash sales
- High withdrawals for family living, for example, college expenses
- Paying down debt rapidly
- Buying next year’s assets from this years cash (prepay for fertilizer, etc.)
Increase in accounts receivable (amount of money you are owed for assets that were sold).
For your tax return you may want to use cash accounting, but for profitability you want to use accrual accounting. Accrual accounting looks at changes in inventory and price; changes in accounts payable and receivable, appreciation and depreciation, unpaid labor, opportunity costs to work elsewhere, interest on equity, and your labor and management inputs.
Interest on Equity
- Can you borrow money without paying interest?
- Do you have an “opportunity” to put your money somewhere else?
- Do you want to earn interest/dividends on your money in the stock market?
- Shouldn’t you earn interest on the money invested in your farm?
- Plan to pay yourself 3% minimum on your equity invested in the farm!!
Value of Labor and Management
- What is the value of your efforts on the farm?
- What is the “opportunity” for you to work elsewhere?
- A simple charge for your efforts will help you find a value to evaluate your business
- What could you earn if you worked elsewhere in a similar job?
What Does a Manager Do?
Managers make the decisions about investments, and tasks. They define the mission and philosophy for the operation. They develop the plan, hire and motivate the people to implement the plan (or tell the kids what to do), invest in the assets to implement the plan, set priorities, and evaluate the results so they can adjust the plan if needed.
Partial budgeting helps make decisions for smaller investments that do not affect whole farm operation. Look at the expected increases to income and decreases to expenses for a project compared to decreases in income and increases in expenses. This will help you decide how much you can invest, and the impacts on other parts of the business.
The Organic Farmer’s Business Handbook
The handbook, written by Richard Wiswall in his easy-to-read style, takes farmers through the business concepts and tools needed to become financially sustainable. The $32 book is available at http://richardwiswall.com/the-organic-farmer-s-business-handbook/.
Registering Your Business Name: Doing Business As
It is recommended, but not required, that you protect your business name by registering it with your county clerk. This typically involves a fee of $25-$50 and helps prove the existence of your business in addition to preventing other business in the county from using your business name. This may also be required to open a business checking account.
Business Structures – Legal Organization
While most businesses start out as sole proprietorships or general partnerships, they may eventually find that the legal liability and tax consequences are more beneficial if operating under a different structure.
To help understand the legal maze of business structures the Dept. of Applied Economics and Management at Cornell has developed the publication Doing Business in New York State: Structures and Strategies, available online at: http://aem.cornell.edu/outreach/extensionpdf/2004/Cornell_AEM_eb0407.pdf.
New York State recognizes seven different business structures (excluding organizations such as churches and non-profits). A brief description of those structures is listed below.
- Sole Proprietorship – The simplest form of organization wherein an individual simply declares himself or herself a business operator. No paperwork is needed to file with government agencies to establish the existence of the business. The proprietor has unlimited liability for the actions and debts of the business.
- General Partnership – A partnership agreement between sole proprietors. No paperwork is need to form this business and partners have unlimited liability.
- Limited Partnership – Also known as a silent partnership wherein an individual joins a partnership but stays out of the management aspects of the business. For remaining silent in the operation, that partner generally obtains the profits of an owner and does not have the legal liability of a full partner.
- Limited Liability Company (LLC) – A partnership offering the limited liability of a corporation. Paperwork must be filed with the state to establish this form of ownership and management meetings must be held.
- Business C Corporation – Structure used by most companies. The business is operated by a management team that reports to a board of directors. Ownership of the business is in the form of stock and shareholders of that stock have different levels of control over management and the board of directors by the quantity held and class of their stock (ex. Class A, B, C, preferred, etc.). Shareholders have limited liability in the company.
- Business S Corporation – A corporation that is operated like a partnership and offers limited liability to shareholders. Paperwork must be filed with the state to establish this form of ownership and management meeting must be held.
- Cooperative– An organization owned by members who contribute equity toward the business and share in profits generated. This is formed by filing with the state and has similar governance as a C corporation. Voting is either one vote per member or in proportion to patronage of the cooperative. Members have limited liability.
Forming a Business in NY: An Overview
This brochure by the NYS Department of State has information on six types of business structures including what forms need to be filed, the business’s lifespan under that structure, personal liability and tax information. Find the brochure at http://www.dos.ny.gov/corps/pdfs/formingbus.pdf.
What is a Business Plan?
A document that summarizes the operational and financial objectives of a business and contains the detailed plans and budgets showing how the objectives are to be realized.
A good business plan will contain the following:
¨ Resume or brief explanation of your background and relevant experience
¨ Information on your legal structure and management team
¨ Current balance sheet
¨ Your business vision, mission statement, key values, and goals
¨ Production plans
¨ Marketing plans
¨ Estimated start up costs
¨ A projected income statement with a written explanation of your budget assumptions
¨ A projected balance sheet with a written explanation of your budget assumptions
¨ A sensitivity analysis showing the business’s break-even points
¨ Less than 10 total pages so that people actually read it
Helpful Publications for Writing a Business Plan
Cornell Cooperative Extension
Landscape Business Planning Guide – http://dyson.cornell.edu/outreach/extensionpdf/2003/Cornell_AEM_eb0313.pdf
Writing a Business Plan: A Guide for Small Premium Wineries – http://aem.cornell.edu/outreach/extensionpdf/2002/Cornell_AEM_eb0206.pdf
Writing a Business Plan: An Example for a Small Premium Winery- http://aem.cornell.edu/outreach/extensionpdf/2002/Cornell_AEM_eb0207.pdf
NY FarmNet Publications – Available for purchase at www.nyfarmnet.org or 1-800-547-3276
- Starting an Ag-Business? A Pre-Planning Guide
- Doing Business Together: A Joint Business Agreement Guide (Partnerships, Mergers, Joint Ventures, Strategic Alliances, and Contracts)
- Business Transfer Guide: Senior Generation
- Business Transfer Guide: Junior Generation
Sustainable Agricultural Research Education (SARE)
Building a Sustainable Business- www.sare.org/publications/business.htm (order hard copy for $17 or download PDF online for free)
Great resource for a beginning farmer interested in alternative, sustainable, and/or general agriculture. It is 280 pages of education and practical exercise to guide the beginning farmer through the financial, management, and interpersonal skills needed to start a successful farm business.
Getting Help Writing a Business Plan
- Cornell Cooperative Extension- www.cce.cornell.edu/editor/show/In_Your_Community The type of programming offered in each county is unique so contact your county extension office to see if they have a farm management or small business development educator. Often these educators offer business plan workshops and are willing to advise, review, or assist in writing your plan.
- NY FarmNet and NY FarmLink - www.nyfarmnet.org and http://www.newyorkfarmlink.org/ New York FarmLink maintains a database of farms available for sale or rent in addition to farmers who are seeking business partners to join or gain equity in their business. New York FarmNet has business plan writing publications in addition to several farm counselors throughout the state who offer free and confidential help on any topic of concern, including: finances, farm changes, farm transfer, natural disaster, personal stress, family communication, and marital conflict.
- New York State Small Business Development Center – www.nyssbdc.org A network of 23 regional centers delivering business counseling and training free of charge to New Yorkers who want to start a business or improve the performance of an existing business.
- New York State Online Permit Assistance - http://www.nys-permits.org/ This site will help you find the New York State business permits you may need.
- Empire State Development’s Entrepreneurial Assistance Program – http://www.empire.state.ny.us/BusinessPrograms/EAP.html or 1-800-STATE NY Part of New York State’s economic development agency, they have 9 centers across the state to provide specialized help to women, minority group members and persons with disabilities who are starting or operating an early stage businesses.
- Federal Small Business Administration – www.sba.gov/ny Federal agency with offices throughout the state providing counseling services and loan guarantees. They have a special emphasis area to work with women, minorities, veterans, and businesses involved in international trade.
- SCORE “Counselors to America’s Small Business” - www.score.org SCORE is a nonprofit organization offering free advice and training using experienced volunteers. Check the website for chapters in your area.