Farm Financial Statements and Recordkeeping

Farm Name: ________________________________________ Year: _________________* Completed yearly Farm Financial Statements & Recordkeeping 1 Contents Glossary of Terms ............................................................................................................................ 3 Financial Statements ....................................................................................................................... 4 Income Statement ....................................................................................................................... 4 Balance Sheet .............................................................................................................................. 6 Chart of Accounts ............................................................................................................................ 8 Account Types ............................................................................................................................. 8 Example Chart of Accounts .......................................................................................................... 8 Appendix 1: Income Statement Template ...................................................................................... 10 Appendix 2: Balance Sheet Template ............................................................................................. 11 Appendix 4: Schedule F ................................................................................................................. 12 2 Glossary of Terms Account Types– Businesses categorize financial activities by grouping them into different accounts that are qualitatively distinct. The major account types are: Income, Expenses, Assets, Liabilities, Equity Income/Revenue - Earnings from sales of product or services, or through other means Cost of Goods Sold (COGS) – direct costs of making a sale, or cost of product that will be resold Gross Profit – Difference between total revenue and COGS Expenses – Costs associated with running your business Operating Expenses – Expenses directly related to the operational activities of the business Assets – what the business has that has economic value (land, equipment, buildings, cash, etc.) Liabilities – what the business owes (loans, credit card balances, etc. – i.e. debt) Equity – what the business owns, and the difference between assets and liabilities, or the “worth of the business” in monetary terms Net Income – Difference between total revenue and total expenses Retained Earnings - cumulative net income from previous years (minus owners’ draw) Owners’ Draw – money that owners take out of business to pay themselves Financial Statements – Financial documents used in accounting that summarize financial activity in your business. The three primary financial statements are: the income statement, the balance sheet and the cash flow statement. Income Statement – summarizes income, expenses and net income, over a period of time (e.g. month, quarter, year, etc.) Balance Sheet – summarizes assets, liabilities and owners’ equity (“net worth”) and must always be in balance, according to the following formula: ASSETS = LIABILITIES + OWNERS’ EQUITY Cash Flow Statement – summarize changes in cash position -- cash coming in and going out of business, over a period of time Budget – Summary of projected income and expenses for future period (usually year or multiple years) 3 Financial Statements Financial statements are tools that help business owners organize, interpret and analyze the financial activities of their business, as well as understand the profitability, cash position, and worth of their business overtime and at any single point in time. Unlike a budget, which a business owner can choose to create or not, the financial statements are a reflection of business activity, and are therefore inherent to it. The moment a business earns any revenue or incurs any expense, or records ownership of any product or obligation of any debt, the financial statements come into existence to reflect the financial activity taking place. There are three primary financial statements: • • • Income Statement Balance Sheet Cash Flow Statement Understanding how to organize and interpret financial statements will help you with overall financial management of your business. Additionally, financial statements are the main documents required for applying for a loan or raising capital, as well as for filing taxes. Each statement summarizes financial activity in a different way, and together, they communicate three key financial indicators that describe the financial “health” of your business: a. What your business is earning and spending over a period of time (Income Statement) b. What your business has, what it owes, and what is owns, at any single point in time (Balance Sheet) c. What the cash position of your business is – i.e. how much cash you have – and what the cash flow of your business is – i.e. how cash “flows” in and out of your business (Cash Flow Statement) Think of these key indicators as the “language” of business. The more fluently you speak it, the better you will be able to manage the financial affairs of your business, and communicate with banks, lenders, investors, accountants, etc. Income Statement The Income Statement reflects earning coming into the business, or “income,” and spending going out of the business, or “expenses.” Because earning and spending are ongoing within a business, the income statement presents a summary of activities over a period of time (e.g. week, month, quarter, year, etc.). Primary Features • Summarizes activities over a period of time • Details activities directly associated with the business operations, e.g.: o Product Sales o Seed purchases o Wages and payroll expense 4 • • o Rent expense o Etc. Also details activities not directly associated with operations, e.g. o Rental income, for example, if business owner leases land to another farmer o Interest expense on a loan o Depreciation expense on equipment or infrastructure o Tax expense Presents total revenue, total expenses, and difference between revenue and expenses, or “net income” Note: The income statement is sometimes referred to as the “profit and loss statement.” Ultimately, the purpose of the income statement is to help you understand the profitability of business activities, by comparing income and expenses and coming up with your net income (profit) or net loss. All income statements display revenue, expenses, and net income, but it is somewhat up to you how you organize them. At the very least, it is important that your income statement includes the relevant revenue and expense categories listed on the Schedule F form (see section on Schedule F), which is the tax form that all farmers should file each year. For further analysis, you may find it helpful to organize your income statement by the following categories. Sales: Sales activities are generally presented on the income statement in one of two ways: 1) by market channel (e.g. wholesale, farmers’ market, CSA, etc.), or 2) by product type (e.g. produce sales, meat sales, value added sales, etc.). For the income statement, it is best to stick to one, in order to keep the information consistent. That said, business owners can create separate financial reports that look at sales by sales channel and product type (e.g. produce sales at farmers’ markets vs. produce sales through a CSA). Accounting software programs (QuickBooks, etc.) make it easy to generate these more detailed reports. Cost of Goods Sold (COGS): For farm businesses, COGS can be confusing to track. Generally, COGS refer to costs incurred with each additional sale, where for every sale made, there is the associated COGS. But for a farm business, the distinction between costs associated with sales and costs not associated with sales is a blurry one. If you sell 10 cases of kale, is the kale a COGS? What about the packaging? What about the labor to harvest and pack the kale? What about the delivery? For many farm businesses, it is more straightforward to track “variable” and “fixed” costs (defined below), instead of COGS. The exception to this would be if you buy in product for resale. For example, if you run a CSA and you buy some product from other farmers, the cost of that product would be tracked as a COGS. For our purposes, we will focus on variable and fixed costs. Variable vs. Fixed Costs: In short, variable costs increase as sales increase, whereas fixed costs stay more or less constant regardless of sales. For example, packaging is a variable expense – for every additional case sold, you need an additional box. Internet, on the other hand, is a fixed cost. Regardless of your sales for the season, your monthly internet expense remains the same. Separating expenses into these two categories can help you understand what it costs to make a sale, which will give you important information about the price you need to charge for your product, whether or not you want to continue growing a certain crop, etc. 5 Within one season, it is fairly straightforward to identify the variable and fixed costs that make up your operating expenses. However, year over year, it gets more complicated, specifically with regard to assessing fixed costs. As a farm business grows, its fixed costs change. In that sense, many fixed costs are still variable, but over a longer period of time. Rent is a good example of this. If you rent one acre, your rent cost is fixed regardless of your sales for the season. But as you build your business, you will likely expand production based on increased demand for your product. In order to expand production, you will acquire more land, so your rent expense will increase. While the rent cost is fixed for a given season, irrespective of sales, the increase in land is an result of the increase in sales. Operating Expenses: Operating expenses encompass all expenses related to business operations. For tax purposes, simply listing operating expenses according to the Schedule F categories (see Schedule F) is sufficient. However, you may find that further categorizing your operating expenses gives you valuable insight into spending patterns, which can be very helpful when making management decisions for your business. Below are examples of the types of categories that can be useful: • Direct operating expenses are those that are associated directly with production and sales: seeds & plants, fertility & pest management, supplies and packaging, animal feed, farmers’ market fees, delivery costs, etc. • Labor costs include employees’ wages and benefits, payroll taxes and contract labor costs. Importantly, payment to owners is not considered a labor cost. Owners’ payment shows up on the balance sheet. • Land or occupancy costs include rent or mortgage expense, property taxes, utilities, etc. • Repairs and maintenance costs include repairs to equipment, buildings, irrigation systems, vehicles, etc.* • Administrative/general costs include expenses not directly associated with production and sales, such as office supplies, insurance, phone and internet expense, accounting or CSA software expense, marketing and advertising, mileage and other vehicle expenses. Sometimes these general costs are referred to as “overhead” costs. Balance Sheet The income statement summarizes the incoming and outgoing flow of money (or its proxy, for example, if you trade your products for other goods or services) in the business, otherwise known as earning and spending. It also shows you how profitable your business is, based on its direct operating activities. But the income statement can’t really tell you how much your business is worth, or whether it is increasing or decreasing in value over time. However, higher value purchases are not included on your income statement. Large purchases of equipment, infrastructure, land, etc. do not show up on the income statement because, while you incur the expense of purchasing them, you also now have something that adds value to your business. The income statement can’t really quantify that increased value in your business, so we need a different tool to measure the overall value of your business. That tool is the balance sheet. The balance sheet summarizes what a business owns and owes, and in turn, what it is worth. What is owns is its “assets.” An asset is something that the business owns, that will last multiple years and has a significant monetary value. What it owes is its “liabilities,” or debt. A liability, or debt, is something that a business owes, which is generally a loan of some kind. The difference between assets and debt is the “owners’ equity” of a business, also called “net worth.” The balance sheet summarizes assets, liabilities and owners’ equity at one point in time (usually at the end of a fiscal period, e.g. month, quarter, year, etc.). Whereas the income 6 statement is like a video clip summarizing business activity over a period of time, think of the balance sheet as a snapshot of your business at a single moment. There is a formula for the balance sheet that must always be true: ASSETS = LIABILITIES + OWNERS’ EQUITY Primary Features • Gives a snapshot of the business at one point in time • Summarizes assets (what the business owns), liabilities (what the business owes) and the owners’ equity (net worth) of the business (the difference between assets and liabilities) Assets Assets are tangible things that your business owns, and that could theoretically be sold to generate cash. Generally speaking, assets can be used for more than one year, and are worth at least several hundred dollars. • Cash in the bank – yes, cash is an asset! • Outstanding invoices – unpaid invoices that customers still owe you (“accounts receivable”) • Tractor and implements • Vehicles • Buildings • Land • Etc. Liabilities • Operating or equipment loan • Mortgage • Credit card balances • Line of credit • Unpaid bills • Etc. Owner’s Equity (Net Worth) • Retained earnings – net income of current year + cumulative net income from previous years • Grants • Owners’ equity • (-owners’ draw) 7 Chart of Accounts Account Types ASSETS – what the business has, including land, buildings, equipment, breeding animals, etc. Also includes, business bank accounts, cash on hand, prepaid expenses and accounts receivable (unpaid invoices). LIABILITIES – what the business owes (its debt), including short- and long-term loans, credit card balances, mortgage, etc. EQUITY – what the business owns, including the owners’ capital, retained earnings, net income (or loss) at the end of the year, minus owners’ draw INCOME – revenue generated from sales, as well as rent revenue or any other business activity that generates revenue (such as educational offerings, events, agritourism, etc.) EXPENSES – any costs associated directly business operations, including costs directly associated with production, such as seeds, packaging, payroll, inputs, etc., as well as administrative and general costs. It also includes costs not directly related to operations, such as interest expense. Example Chart of Accounts Account Name Account Type Sales: Wholesale Income Sales: CSA Income Sales: Farmers’ Markets Income Sales: Restaurants Income Direct Operating: Car and Truck Expenses Expense Direct Operating: Fertilizer and Spray Expense Direct Operating: Gasoline, fuel Expense Direct Operating: Packaging Expense Direct Operating: Repairs and Maintenance Expense Direct Operating: Seeds and Plants Expense Direct Operating: Storage Expense Direct Operating: Supplies/Small Tools Expense Direct Operating: Vehicles, Machinery, Equipment Expense Payroll: Labor Expense Expense Payroll: Workers’ Comp Expense 8 Payroll: Employee Benefits Expense Payroll: Payroll Service Expense General/Administrative: Computer/Printer Expense General/Administrative: Insurance (General/Product Liability) Expense General/Administrative: Certifications/Licenses/Permits Expense General/Administrative: Marketing/Advertising Expense General/Administrative: Office Supplies Expense General/Administrative: Software/Website Expense General/Administrative: Telephone/Internet Expense Occupancy: Rent/Lease Expense Occupancy: Utilities Expense Other: Interest expenses Expense Other: Taxes Expense Business Checking Account Bank Cash on Hand Bank Accounts Receivable Current Asset Inventory Current Asset Owned Land Business Credit Card Accounts Payable Mortgage Long Term Asset Credit Card Current Liability Long Term Liability 9 Appendix 1: Income Statement Template Start date: Revenue Sales Wholesale CSA Farmers’ Markets/Farm Stands Restaurants Other Total Revenue Cost of Goods Sold (product purchased for resale) Gross Profit Operating Expenses Direct Operating Expenses Seeds and Plants Fertilizer and Spray Feed Pest Management Supplies and Packaging Hired Labor Hired Employees - wage + payroll Workers' Comp + Disability Contract Work General & Administrative Expenses Liability Insurance Office Supplies Telephone/Internet Software (Accounting, POS, etc.) Marketing/Advertising Permits, Licenses, Certifications Other Repairs & Maintenance Expense Car and Truck Expenses (mileage) Storage Fuel Repairs & Maintenance Expense Tools Other Occupancy Rent/Lease Utilities Total Operating Expenses Operating Income Other Expenses Interest Expense Depreciation Total Other Expenses Income before Taxes Taxes End date: $ Value Net Income (or loss) 10 Appendix 2: Balance Sheet Template As of date: ASSETS $ Value Current (short-term) Assets Farm Bank Account Cash on Hand Accounts Receivable Inventory Fixed (long-term) Assets Farm Land Farm Equipment Farm Vehicles Farm Buildings Other Total Depreciation (-) Total Assets LIABILITIES Short-term Liabilities Credit Card Loan Balance Accounts Payable Operating Loan Balance (1-12 mos.) Long-term Liabilities Tractor/Equipment Loan Balance Mortgage Long-term Operating Loan Balance (12+ mos.) Vehicle Loan Other Loans/Debt Total Liabilities EQUITY Owners' Capital/Owners' Contribution Net Income (or loss) Retain Earnings Owners' Draw (-) Total Equity Total Liabilities + Total Assets ASSETS = LIABILITIES + EQUITY 11 Appendix 4: Schedule F 12