Estimating and Tracking Production Costs

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Estimating and

Tracking ProductionCosts

SHANNON DILL, EXTENSION EDUCATOR

UNIVERSITY OF MARYLAND EXTENSION, TALBOT COUNTY

[email protected]

410-822-1244


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GoodManager

GoodProduction

FarmProfitability


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Overview•

Estimating Production Costs• Creating Crop Budget• Using Cash Flow• Record Keeping•

Tracking the Costs


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Enterprise budgets are a great way to estimate your production costs per cro◦ An organized listing of your estimated gross income and costs which can

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?


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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


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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, fixedequipment cost per dollar returned.

• Plan crop rotation schedules and product mix


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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 inp◦ Examples

◦ Organics, niche crops, rotational grazing, value added activities

There are great templates out there but use them only as a guide


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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 -


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E X A M P L E

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

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


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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


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


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Eggplant Exampleper pound in a 100x40 bed

Variable Costsper unit

$86.41/130lbs = $0For every pound gr$.66 in variable co

Fixed Costs perunit

$10.57/130lbs = $0For every pound g$.08 in fixed costs

Break evenprice

($86.41+$10.57)/1You must charge abreak even. At $.76your first profit

Break evenoutput ($86.41+$10.57)/$You must grow anpounds of eggplaneven. At 70 poundyour first profit.

Net incomeper unit

($182-$96.98)/130You make $.65 pereggplant you sell


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Financial Plan

Balance Sheet Income Statement Cash Flow


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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 yourincome 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>


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gYear 1 or Year 2 or Year 3 or Year 4 or

Last year 1s t quarte r 2nd quarte r 3rd quarter 4th quarter Tota lCash 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 outflow

8. 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:


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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


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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


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Farmers Manage Cash, Capital and Peop• 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


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Recordkeeping

Proof – The IRS may ask for revenue, expenses and inventoryitemsDecision Aids – Records help with making decisions onpurchases, enterprises etc.Institutional Requirements – Lending agencies, FSA, crop

insurance require production and acreage reportsEnvironmental – Nutrient management, pesticides, bio-solids,irrigation all require records. Good r

your fahowevewithout


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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


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Resource Inventories

Count and assign value to your resources to inventory your faResources include:

◦ Assets: Items you own◦ Liabilities: indicate what you owe


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Income and Expense RecordsTransaction Journal (farm checkbook)

◦ Includes:◦ Date, check receipt number, amount of check or deposit, and the payee o

income source – use a memo so you know important info

General Ledger1. Farm cash receipts

2. Farm cash disbursement


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Summary of Records• Household Budget• Enterprise Budgets• Balance Sheet• Cash Flow

• Projected• Actual

• Production Schedule• Production Records

• Seed, Fertilizer, Pesticid• Yield records for FSA, C

Insurance• Sale Records


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Other types of records??• Household Budget• Marketing, CSAs• Organic• Food safety (GAP)•

Customers• Vendors• Lease agreements


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Tracking Income and Expenses

• Account Methods

• Cash Method - record expenses in financial accounts when the cash is actually laid out, andbook revenue when they actually hold the cash (most popular for farms)

• Accrual Method - it records revenue/expenses when the actual transaction is completed notwhen it receives the cash


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Organizing Financial Information• General ledger – Examples• Computer systems

• Microsoft Templates• Excel• Quicken• QuickBooks• APPs


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

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


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Excel


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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 custom• Cash or Accrual Accounting• Manages lines of credit and credit ca• An many more


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


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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


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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 ban• Complete a physical inventory and gather inventory information as well as fixed assetinformation and credit card information


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Tips• Purchase the physical product – don’t download from Intuit• Look at your previous year's tax return to get information on depreciationamounts.

• Have an accountant look over your QuickBooks setup after you gather allrequired information but before you make any entries. Omissions and/orincorrect entries can haunt you for a long time.

• For fixed assets, such as property and equipment, you must know thecurrent value and accumulated depreciation.

• Pay any unpaid payroll withholding amounts before your QuickBooks stadate to avoid having to enter them as an open liability. You will need thecurrent balance of all loans and mortgages.


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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 computerespecially if you have teens in the household.

• Save time - Print checks!


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


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HELP!!www.quickbooks.com

Have a great support pageCheck with your accountant –

they may have a QB Pro on staff

http://www.quickbooks.com/http://www.quickbooks.com/


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Documents

Estimating and Tracking Production Costs