The first step to profitability is good recordkeeping. Records give you the information you need to make sound business decisions.
What is Profit?
If you don’t intend for the farm to be your sole source of income, you may consider an enterprise to be profitable if it simply covers its own variable expenses, while an off-farm income source pays for the farm’s overhead expenses (property taxes, farm insurance, utilities, etc). The most important lesson here is to be clear and realistic about your financial goals for the farm, and map out a strategy to get there.
Profit is a simple concept that gets more complicated in reality, especially since many people use the term to mean different things. The basic formula for profit is:
Revenue – (Fixed + Variable Expenses) = Profit
Profit may be used to reinvest in the farm, save for the future (retirement?), or invest in your quality of life (family vacations, etc). Some farmers include a payment for their salary and living expenses (often called “Owner’s Draw”) in their profit; others include their labor on the expense side of the equation. It’s a matter of choice and also goals: if you are intending for the farm to be your sole income source, you will need to be certain it can cover all of your expenses and provide for your future. If you expect always to have an off-farm source of revenue, your expectations for what the farm will provide may be different.
Track Expenses by Enterprise
Tracking labor, equipment, and other variable costs by enterprise will enable you to price your products accurately, so that you make a profit. To keep records with this level of detail requires both a system that works for you personally, and the motivation and discipline to maintain the records. The incentive is PROFIT: the ability to keep your farm in business, so the stakes are high. Having good systems in place before the rush of the season will make recordkeeping much easier, and analyzing your records at least a few times a year will reinforce the need to keep good records to make smart business decisions.
You can keep track of tasks and expenses, such as plowing time and fertilizer, for the entire farm and then allocate these through enterprises based on square footage or acreage used by a particular enterprise or product. Keep track of daily time spent for efforts or expenses required by specific products — such as transplanting or weeding — separately. Add all of these expenses together for each product or enterprise to determine cost per product. Be sure to keep track of harvestable yields or the amount of product that was actually sold, as these impact your price per unit.
Keeping track of all this during the very busy season will require that you set up recordkeeping systems before you get so busy. During the winter, make up spreadsheets and binders for keeping track of harvests, seeding, birthing, weaning, etc. and put each spreadsheet on a clipboard with a pen near where you’ll need to document the information.
Small farms and many businesses just starting out find that paper notebooks and folders meet their needs. Keep all sales receipts in one folder, expense receipts in another, maintain a capital asset depreciation log, and keep notebooks 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.
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 (you’ll find this by searching 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.
This easy-to-use online program is designed to serve the recordkeeping needs of small farms. In its 1.0 version, it is primarily for vegetable farmers to track field management, labor and equipment use, planting and harvesting schedules, and crop yields. Future versions will include financial recordkeeping, and functionality for livestock farmers to keep records on their herds or flocks.