Financial Sustainability in 6 Easy Steps
Talia has been raising and selling livestock for the last 5 years. She sells the chickens, pork and beef at farmers’ markets and direct to her customers who pick up their orders from her farm. Up until this point, she’s been managing and operating the farm by herself, but she hopes to build the business large enough, and profitable enough so that her husband can quit his off farm. The farm has shown a modest profit, but certainly not enough to support her, much less her whole family.
What does Talia need to do to be financially sustainable? It’s a big question; and certainly, there are no easy answers. But the process to get the answers is straightforward. We spent the last few months working together to figure it out.
Steve owns a vertically integrated pie and jam business. He grows his own fruits, and then processes them into pies and jams that he sells wholesale. Over the last few years, he’s struggled to manage cash flow. In order to scale his business, he needed to grow more fruit, and produce more jams and pies. More production means more cash outflows. Because he grows/creates his products during the summer; and then sells them year-round there’s a considerable delay from when he has production costs to when he gets paid. He’s been in a constant cash crisis for the last 2 years, even though his business is growing. How does he get ahead of the cash flow curve? Still no easy answers.
Whether it’s figuring out how to be financially sustainable, or better managing your cash today to avoid a crisis tomorrow, the process is the same. And it can be distilled into 6 “easy” steps.
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Set up a solid recordkeeping system
As the old saying goes, “You can’t manage what you don’t measure.”
To accomplish any planning or analysis, you need to have good records of what you did in the past. The past data gives you a baseline of where you are and can help you understand what you need to change to achieve sustainability or avoid a cash crisis.
A good recordkeeping system is more than just tracking your sales and expenses for tax-day. It’s about knowing and tracking the important numbers for your business, so you can improve profitability, set goals, and grow your business.
Resources
- Learn more about the basics of recordkeeping (whether you use Excel or QuickBooks) and what you need to do to easily answer the questions you have about your business and financials.
- Ready for QuickBooks? You can watch the video tutorials for getting started and set up.
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Keep up with your data entry
A good recordkeeping system is only as good as the data that gets entered, which means entering data regularly. It’s important to keep up with your bookkeeping for 3 reasons:
- It ensures that you are consistent in how you enter things in. Seeds are always entered as seeds (as opposed to seeds one day and field supplies another)
- You won’t lose track of those random purchases. What was that amazon charge??
- It prevents the recordkeeping from becoming an overwhelming albatross that lurks in the corner. If you sit at your desk just once a month for bookkeeping, you’ll be overwhelmed and keeping up will be even more difficult.
Resources
- For Video Tutorials on the most common transactions in QuickBooks, watch the videos in QuickBooks QuickTips course.
- Need help finding time to keep up with your bookkeeping? I offer several tips here.
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Understand your cost of production, and price your products accordingly.
I know this is obvious, but it’s worth saying out loud: you need to sell your products at a price that is higher than your cost of production. If you don’t know your cost of production, then you don’t know if your products are priced properly.
Talia and I went through her production costs and determined that she was losing money on her pigs. While it was initially demoralizing to recognize that reality, it armed her with options to remedy it:
- She could raise her prices
- She could explore her production practices to
- increase efficiencies (thereby reducing production costs per animal)
- increase animal weight
- She could research other vendors for better pricing
Steve did a cost of production analysis on his pies and jams. He discovered that his highest margin products were also the slowest sellers; and the lowest margin products were his best sellers. With this mismatch, he recognized that he needed to rethink his marketing, sales and pricing strategies so that his most profitable products are also the highest sellers.
Resources:
- Watch videos on how to calculate cost of production and its impact on pricing strategies.
- Use our Pricing Calculator to figure out the appropriate selling cost for your products.
- And coming soon! We have a new recipe costing calculator that will help you calculate the cost of your value-added products.
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Create a cash flow budget
As Steve experienced, the natural ebbs and flow of business can make it difficult to manage cash. He frustratingly had lots of unnecessary bank fees from bounced checks. Steve can attest: a profitable business does not ensure cash in the bank.
In order to plan for the ebbs and flows of cash – which is particularly important in a highly seasonal/cyclical business – you need a cash flow budget. This helps you:
- see the impact of decisions today many months down the line
- predict when cash will be tight
- make adjustments before you have a cash crisis.
Resources
- You can use our “Quick and Dirty” cash flow projections template.
- For a more robust tool, you can use this cash flow template.
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Set Sales and Profit Goals
Talia knows she wants to generate enough profits to support the farm and her family without relying on her husband’s off-farm income. This isn’t some vague, “I want to make a lot of money.” It’s a very concrete number; and she will know when she gets there.
When Talia was thinking about profit goals, she considered three things:
- How much income does she need to live comfortably?
- How much does she want to save each year for retirement and/or investment in the business?
- How much profit does she need to cover your debt service?
You now have your profit goals… and going back through your historical financials (since you also have a good recordkeeping system) you know your fixed and variable costs; you can now calculate the volume of sales needed to achieve your profit goals.
Resources
This fall, we’ll be hosting a live webinar on calculating breakeven. Stay tuned for details. In the meantime, you can watch this video.
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Invest Wisely
It’s tempting to go for all the shiny new objects and talk yourself into why you must have it! But be sure it will bring appropriate value to the farm, and you can afford to associated debt.
As Brett Grohsgal from Even Star Farm was quoted in our last newsletter:
“A greenhouse: it’s a shelter that lets in light. It doesn’t have to be really expensive to be good. If you can save $20K, you’ll have that for other expenses. Don’t always buy the latest/greatest unless you’re absolutely sure it can pay for itself in 3 years; or it’s super-reliable (like a tractor) and will last 15 years.”
Resources
- Watch this video course on how to evaluate investment opportunities.
When you’re ready to take control of your business and financials, we’re here to support you! Many of the resources mentioned above are included with the Business Essentials membership of The Farmer’s Office. To take advantage of them; we’re offering a special promotion: 1 free month of business essentials access. This offer is good through September 30, 2022! When registering, use the discount code 6easysteps
