One question we receive a lot at KCARD is how to begin looking at a business’s financial statements and learning from them so that you can make good decisions going forward. Right now, this topic is especially timely since we know a lot of folks who are calendar-year tax filers are putting together their documents to take to their tax preparer.
So, if you are the person who has never taken a hard look at your business numbers, where do you start?Break down your revenues as best you can by either enterprise (beef, hay, vegetables, etc.) or by marketing channel (City of Farmville market, stockyards, on-farm, etc.) or both.
Separate your expenses by enterprise for the ones you can. Assign your expenses the same categories you used to assign your revenues as much as you can. For example, you know that the purchase of hay for your cattle is toward your beef enterprise. You can use this expense to calculate how much it costs you to produce each unit, which can give you an idea of breakeven prices.
Make a list of the expenses that are not specific to a particular enterprise or marketing channel. These are often called overhead expenses. They would include such categories as insurance, marketing, or office supplies.
Compare your revenues to the direct expenses you identified in Step 2 to see first off if you have any enterprises that do not cover their costs. For example, if the Cost of Goods Sold for you’re your ostrich enterprise exceeds your revenue for the ostrich enterprise, you need to take a hard look to figure out why. What this means is that you are subsidizing your ostrich business with other income, and if you do not have a pathway to reverse that, that ostrich business will always be that drain on you.
Compare your marketing channels. If you sold $55,000 at the City of Farmville Farmers Market and sold $45,000 at the City of Soilville Farmers Market, you might think that you should aim to sell on more market days in Farmville. However, if you break your transportation costs out by market and add in booth fees for the different markets, you might find that Farmville actually does not yield as much net profit as Soilville.
Ultimately, your goal at looking at the numbers for your business is to arrive at good information that helps you make good business decisions. To do that, you want to break down the big numbers you send to your tax preparer into their parts so that you can make comparisons. This is just a first step, but if you want to learn more and take more steps, feel free to call KCARD at (859) 550-3972 or email us at kcard@kcard.info and we can help.