Estimating and
Tracking Production
Costs
SHANNON DILL , EXTENSION EDUCATOR
UNIVERSITY OF MARYLAND EXTENSION, TALBOT COUNTY
SDILL@UMD.EDU
410-822-1244
Good
Manager
Farm
Profitability
Good
Production
Overview
•Estimating Production Costs
•Creating Crop Budget
•Using Cash Flow
•Record Keeping
•Tracking the Costs
What are enterprise budgets?
Enterprise budgets are a great way to estimate your production costs per crop
◦ An organized listing of your estimated gross income and costs which can be
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
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
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, fixed
equipment cost per dollar returned.
•Plan crop rotation schedules and product mix
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 inputs
◦ Examples
◦ Organics, niche crops, rotational grazing, value added activities
There are great templates out there but use them only as a guide
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 -
EXAMPLE
Iowa Vegetable Production Budgets
https://store.extension.iastate.edu/Prod
uct/Iowa-Vegetable-Production-Budgets
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
Dealer 1
Dealer 2
Dealer 3
12 lbs $10.00
10 lbs $11.00
10lbs $7.50
•Labor – Keep a log of time. Assign a value to hourly rates
•Fuel – keep a log of fuel usage
Fixed Cost Estimations
•You are paying these now – DIRTI (Depreciation, Insurance, Repairs, Taxes, Interest)
Eggplant Example
per pound in a 100x40 bed
Variable Costs
per unit
$86.41/130lbs = $0.66
For every pound grown it costs
$.66 in variable costs
Fixed Costs per $10.57/130lbs = $0.08
unit
For every pound grown it costs
$.08 in fixed costs
Break even
price
($86.41+$10.57)/130lbs = $0.75
You must charge at least $0.75 to
break even. At $.76 you begin
your first profit
Break even
output
($86.41+$10.57)/$1.40 = 69lbs
You must grow and sell 69
pounds of eggplant to break
even. At 70 pounds you make
your first profit.
Net income
per unit
($182-$96.98)/130 = $0.65
You make $.65 per pound of
eggplant you sell
Financial Plan
Balance Sheet
Income Statement
Cash Flow
Financial Plan
•Very important and necessary component of the business plan
• Balance Sheet – Solvency
• Income Statement – Profitability
• Cash Flow – Liquidity
• Pro Forma Statements - projections
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 your
income 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>
Last year
Year 1 or
Year 2 or
Year 3 or
Year 4 or
1st quarter 2nd quarter 3rd quarter 4th quarter
Total
Cash inflow
1.
2.
3.
4.
5.
6.
7.
Beginning cash balance
Crop sales
Livestock sales
Other farm income
Capital sales
Non-farm receipts
Total cash inflow (total 1 to 6)
0.00
0
0
0
0
0.00
0.00
0.00
0.00
0
0
0
0
0
0
0.00
Cash outflow
8. Chemicals
9. Custom hire
10. Feed purchased
11. Fertilizer and lime
12. Freight and trucking
13. Gasoline, fuel, and oil
14. Insurance
15. Labor hired
16. Rent or lease
17. Repairs and maintenance
18. Seeds and plants purchased
19. Supplies purchased
20. Taxes
21. Utilities
22. Vet., breeding, medicine
23. Other farm expenses
24. Capital purchases
25. Family living or withdrawals
26. Term loan payments
27 Total cash outflow (total 8 to 26)
0.00
0.00
0.00
0.00
0.00
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0.00
0.00
0.00
0.00
0.00
0.00
0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Cash flow summary
28. Inflow minus outflow (lines 7-27)
29. New borrowing: term
30. New borrowing: credit line
31. Credit line payments
32. Ending cash balance (28+29+30-31)
Comme nts:
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
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
Farmers Manage Cash, Capital and People
•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
Recordkeeping
Proof – The IRS may ask for revenue, expenses and inventory
items
Decision Aids – Records help with making decisions on
purchases, enterprises etc.
Institutional Requirements – Lending agencies, FSA, crop
insurance require production and acreage reports
Environmental – Nutrient management, pesticides, bio-solids,
irrigation all require records.
Good records do not ensure
your farm will be successful;
however, success is unlikely
without them!
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
Resource Inventories
Count and assign value to your resources to inventory your farm
Resources include:
◦ Assets: Items you own
◦ Liabilities: indicate what you owe
Income and Expense Records
Transaction Journal (farm checkbook)
◦ Includes:
◦ Date, check receipt number, amount of check or deposit, and the payee or
income source – use a memo so you know important info
General Ledger
1. Farm cash receipts
2. Farm cash disbursement
Summary of Records
•Household Budget
•Production Schedule
•Enterprise Budgets
•Production Records
• Seed, Fertilizer, Pesticide, etc
• Yield records for FSA, Crop
Insurance
•Balance Sheet
•Cash Flow
• Projected
• Actual
•Sale Records
Other types of records??
•Household Budget
•Marketing, CSAs
•Organic
•Food safety (GAP)
•Customers
•Vendors
•Lease agreements
Tracking Income and Expenses
•Account Methods
•Cash Method - record expenses in financial accounts when the cash is actually laid out, and they
book revenue when they actually hold the cash (most popular for farms)
•Accrual Method - it records revenue/expenses when the actual transaction is completed not
when it receives the cash
Organizing Financial Information
•General ledger – Examples
•Computer systems
• Microsoft Templates
• Excel
• Quicken
• QuickBooks
• APPs
Templates http://office.microsoft.com/en-us/templates/
Excel
Advantages of QuickBooks
•Ease of use
•Generates financial statements
•Will write checks
•Creates invoices
•Manages accounts payable/receivable
•Maintains list of vendors and customers
•Has QuickPay
•Cash or Accrual Accounting
•Has payroll features
•Manages lines of credit and credit cards
•Easy to reconcile & produce reports
•An many more
•Enterprise accounting
Other Advanced Features
•Enterprise accounting
•Raising and selling feed
•Financial forms and estimated cash flow
•Tax records
•Financial ratios
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
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 bank
•Complete a physical inventory and gather inventory information as well as fixed asset
information and credit card information
Tips
•Purchase the physical product – don’t download from Intuit
•Look at your previous year's tax return to get information on depreciation
amounts.
•Have an accountant look over your QuickBooks setup after you gather all
required information but before you make any entries. Omissions and/or
incorrect entries can haunt you for a long time.
•For fixed assets, such as property and equipment, you must know the
current value and accumulated depreciation.
•Pay any unpaid payroll withholding amounts before your QuickBooks start
date to avoid having to enter them as an open liability. You will need the
current balance of all loans and mortgages.
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 computer –
especially if you have teens in the household.
•Save time - Print checks!
Which is Right for you?
There is a variety of products available depending on your platform and business needs
HELP!!
www.quickbooks.com
Have a great support page
Check with your accountant –
they may have a QB Pro on staff