Fearless Farm Finances……

Enterprise Budgets:Which part of your

business is or is not making money…

Craig Chase, Field SpecialistFarm & Ag Business Management

Plan for today• Two ways to improve profitability

– Increase profitability per unit (or margin) while selling the same number of units.

– Increase the number of units sold while keeping the same profitability per unit.

So what is margin?

• Margin is the difference between what you sold your product for and what the cost of producing and marketing that product was (pp. 195-199).

• To get a better understanding of margins we need to keep enterprise records.

Enterprise Budget

• An enterprise budget is an estimate of costs and returns to produce a product (pp. 162-174).

• For producers who grow a large number of different products.– Develop budgets for those products that

contribute the most to your business goals.– Think of the 80/20 rule – for most businesses

80% of their profits (not revenue) are provided by 20% of their products.

Example of 80/20

• You sell 5,000 chickens for $15.00 per chicken for a total of $75,000 in revenue.

• You also produce vegetables for a CSA; 60 shares at $350 per share for a total of $21,000 in revenue.

• Poultry is approximately 78% of your revenue.

Example of 80/20

• Your net profit margin for chickens is $2 per head; $10,000.

• Your net profit margin for vegetables is $7,000.

• Poultry is approximately 59% of your net profit margin. As an enterprise, poultry has a net profit margin of 13%.

Example of 80/20

• How would you treat the vegetable enterprise (as a secondary or primary enterprise)?

• What should you do with the poultry enterprise?

Enterprise Budget• You can develop enterprise budgets for each

major part of your business.– Example, CSA with poultry/livestock. Complete a

CSA and livestock budget.– CSA with multiple seasons and use of high

tunnels/greenhouses. Complete an enterprise budget for each season (spring, summer, fall) or production system (open ground, high tunnel, greenhouse).

• The process is the same for all scale of farming operations.

Simplified Enterprise Budget

Salad Greens (4x100 ft bed)Revenue: 30 lbs @ $5.00/lb $150.00Crop inputs: (Seed, fertilizer, etc.) 7.00Labor 28.00Supplies 1.00Ownership (machinery, land, irrigation) 11.00 Total production cost $ 47.00Marketing costs $ 50.00Profit margin (%) $ 53.00 (35%)

Simplified Enterprise Budget (p. 165)

Green Beans (4x100 ft bed)Revenue: 120 lbs @ $3.00/lb $360.00Crop inputs: (Seed, fertilizer, etc.) 25.00Labor 180.00Supplies 4.00Ownership (machinery, land, irrigation) 11.00 Total production cost $ 220.00Marketing costs $ 68.00Profit margin (%) $ 72.00 (20%)

Profit Margin Analysis

• Your goal was to have a profit margin of 25%; or $0.25 out of every $1.00 of sales to stay in your business.

• Profit margin is what is left over to pay for your general farm overhead, family living expenses, savings, and farm growth.

Profit Margin Analysis

• You determine your profit margin analysis for each of your six major crops and put them in a table (that follows)…these are the six major crops that contribute 80% or more of your whole-farm profit margins.

Profit Margin AnalysisRevenue Total Costs Profit Margin

Carrots $ 136.00 102.00 $ 34.00 (26%)

Specialty Green Beans

$ 360.00 288.00 $ 72.00 (20%)

Greens $ 150.00 97.00 $ 53.00 (35%)

Heirloom Tomatoes

$ 700.00 443.00 $ 257.00 (37%)

Potatoes $ 150.00 126.00 $ 24.00 (16%)

Snow Peas $ 175.00 153.00 $ 22.00 (13%)

• Three (half) of your crops have a profit margin below your goal of 25%; potatoes, snow peas, and specialty green beans.– What do you do to increase their profit margins?

• Three (half) of your crops have a profit margin above your goal of 25%; greens, carrots, and heirloom tomatoes.– Do you analyze these as well or are you happy

with the numbers?

Profit Margin Analysis

Remember….

• There are two ways to improve profitability…one of them is to increase your profit margin per unit produced.

• So you can either reduce your costs to produce and market your product or increase your price.

• Let’s first look at reducing your costs…

Reducing Cost – Enterprise Budget• Use the budgets to calculate break-even

prices and yields (pp. 164-167).– For example, cost per lb. of beans sold was

$2.40 ($288/120 lbs).– Compare this number to other producers or

published budgets to determine where costs are different and why.

Reducing Cost – Enterprise Budget• A second reason – track key costs.

– Green bean example, $180 (or 82%) of the total production cost is labor. Most of the labor is weeding and harvesting.

– Question - can labor be lowered without reducing yields (i.e., can labor be more efficient)?

– Crop inputs is a small percentage (10%) of total production costs, a 10% reduction in costs won’t affect total production costs significantly. Don’t spend time on small items…

Pricing• The second way of increasing profit margin

per unit sold is increasing the price of the product (pp. 193-199).

• For an individual product, what does it cost to produce and market that product?

• If snow peas cost $3.06 per lb. to produce and market, what should the price be?

Pricing• So if your margin goal is 25% and your

break-even cost is $3.06 per lb., your sales price would need to be $4.08 per lb. (3.06/.75).

• Will your consumers and competition allow this price? If not, what price will they allow and what is your profit margin at that price? If you can’t get to where you want, what do you do?

Pricing

• Same process regardless of what you are producing…

• Example – CSA share cost you $240 per share to produce and market, price it at $320 ($240/.75).

• Chickens cost you $2 per lb. to produce and market, price at $2.67 per lb. ($2/.75).

Yes or No to Change - Enterprises• Production change – key question: can you

either increase yields without increasing costs or decrease costs while maintaining yields?

• Product mix (pp. 170-172) – compare products based on your most limiting factor. If labor, determine which products return the most to you per hour. The ranking will likely be different on a per hour basis (e.g. green beans).

Yes or No to Change- Enterprises

• Pricing – you need to know your costs or otherwise you are shooting in the dark. Add a desired profit margin to your total cost of producing and marketing your product(s). Compare that price to customers’ willingness and competition.

• Market outlet – compare outlets that are available to you. Don’t focus on selling price (gross revenue), focus on profit margins.

Increasing Profit by Increasing Yields

• Second way of increasing profits… increasing the number of units sold without increasing the cost per unit.

• Can use partial budgets or enterprise budgets to note production level changes and determine if profit margins are increasing or decreasing.

Increasing Profit by Increasing Production

• Most production changes made will lead to an increase in total costs.

• So make your decision based on whether your profit margin per unit stays the same or improves.– For example you look at adding another 500

chickens for next year. As long as the profit margin per bird does not go down, then it would make sense to increase production.

Looking Beyond a Single Enterprise

• You should analyze profit margins for each of your major enterprises and if they fit into the 80/20 rule should all be equal to or higher than your profit margin goal.

• But what about the non-major enterprises?• To keep track of all your non-major

enterprises you need to calculate your whole-farm profit margin and make sure you do not go below your overall profit goal.

Whole-farm Profit Margins

• Whole-farm profitability can be illustrated by the income statement.

• You can use Quicken, QuickBooks, or other program to develop a qualified income statement. Remember that some programs Profit and Loss or Income Statements are not really Income Statements. You will probably need to make adjustments.

Income Statement; Yr ending 12/31/2012Sale of products $140,000

Car and truck, gas and oil 13,200Depreciation, repairs and maintenance 18,000Crop or livestock inputs 19,800Insurance, interest, repairs, taxes 18,400Labor 24,600Supplies 8,000Utilities 8,000 Total Expenses $110,000Net Income $ 30,000

Questions• What was the whole-farm profit margin?

– Answer : 21% ($30,000 / $140,000)• What was your profit margin goal?

– Answer: 25%• Was your own labor covered in the income

statement?– Your income statement is primarily for you so put

it in the form that will help you make decisions.

Discussion

• What do you do if your major products had an operating profit margin over your goal and yet your whole-farm operating profit margin was under?– Were you consistent in how you accounted for

revenue and expense items between your enterprise budgets and whole-farm records?

– Are your non-signature products heavily capital or labor-intensive?

Discussion – More questions

– Are you in the development stage of your business? In other words are you trying to promote a new marketing outlet and/or product that will take time to become profitable?

– Are you at the right scale of operation regarding all your products? Do you have a lot of machinery expense for a non-profitable enterprise? If yes, could this be accomplished in another manner.

Summary

• Improving profitability can occur one of two ways:– Increasing your profit margin per unit while

maintaining sales levels – Increasing your sales levels while maintaining

your profit margins.• Enterprise budgets can be used to determine

current profit margins and determine where they can be improved.

Summary

• All of your signature products should have profit margin equal to or greater than your profit margin goal (think of the 80/20 rule to determine your signature products).

Summary

• If you are below your profit margin goal, what can you do to make it better?– What are the opportunities for increasing your

price – do you have the right customers?– What are the opportunities for changing

production practices (to increase production levels or reduce expenses) or product mix?

Summary – Improving Your Profit

• So, how would you evaluate your business and improve your profits?

• How would you choose what to implement and what not to implement (what would the basis for your decision to be)?

Questions…..Any questions or comments?

Thank You for This Opportunity!Craig A. Chase

Marketing Food System Initiative Program LeaderIowa State Local Food and Farm Program Coordinator

Farm Management – Local Food Systems and Alternative Enterprises209 Curtiss Hall

Iowa State UniversityAmes, IA 50011(515) 294-1854

cchase@iastate.eduhttp://www.extension.iastate.edu/agdm/fieldstaff/cchase.html