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Achieving or Improving Profitability

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How can I achieve or improve my farm’s profitability?
There are many strategies to consider. Start by visiting the Improving Profitability Tutorial for exercises and information to help you work toward a level of profitability that is sustainable for you.
How profitable is farming?
Like most things in farming, you could ask this question of a dozen farmers and get 13 different answers. With the perfect storm of great farmland, high-end markets, solid crop mix, and advanced skills, it is possible to net $70,000/year on less than 2 acres, maybe even better than that. Most farmers make significantly less, and the range of profitability among farms is vast. The pervasive assumption that farming is not profitable is false, but so is the assumption by many new farmers that it’s easy to make a lot of money in farming. The truth is that it will most likely take you quite a few years of sound business decisions, and development of good production systems and markets to be that profitable. But, it is entirely in the realm of possibility that you can make as much money farming as you can in another profession.If you’re getting into farming for the money, make sure you do really thorough research before you invest a lot in start-up. The crux of the matter relates to your expectations. If you are used to being a salaried professional making $40-60,000/year, especially in an urban setting, to hear that a family of 3 running a rural organic farm lives like royalty — eating the freshest organic meats and veggies, spending quality time together, enjoying travel abroad each year — on a net combined income of about $40,000 probably sounds crazy. But it’s it’s fairly common for small-scale family farms. So getting into farming may require an adjustment of your income expectations.

There are a lot of non-monetary “quality of life” variables to consider too. When you own a farm, you take on a lot of risk and the potential for lower financial returns than with a steady office salary, but you may gain enough satisfaction from farming to more than make up for it.

A good way to approach this is to start getting your fixed and variable costs in writing. How much do you need to pay your mortgage/rent, taxes, insurance, and utilities? How much do you need for your family’s groceries, entertainment, health, and play? How much will your farm enterprises cost, and how much money are they likely to generate? If you plan to keep an off-farm job, add that income too. Then subtract the expenses and see how the numbers look. Keep adjusting – changing the enterprise mix, considering how to increase revenue from an enterprise – until the numbers are to your satisfaction. Go through the Improving Profitability Tutorial to learn more.

What are the most profitable crops to raise?
There are no easy formulas for this; every farmer will have a different answer based on her soils, markets, scale, efficiency, etc. This complex question can only be answered through good research and business planning. Identify what you want to raise, investigate the costs and potential returns, and then decide if it meets your goals on paper, before you invest real money. If you work through the tutorials on this site, you will be well on your way to thinking through all the elements that make up this question.A note on enterprise budgets: one way to examine profit potential is to develop an enterprise budget for whatever you’d like to grow. There are literally hundreds of enterprise budgets available online (we offer links to some of our favorites here), but they are often either outdated, developed for an entirely different market, a very different production scheme, or a very different region of the country – sometimes all of the above. For this reason, it’s important to develop your own enterprise budgets by researching likely revenues in your region and markets, and learning about variable costs from farmers with businesses similar to yours.

If you’d like personalized help answering this question, check out the next offering of our Markets and Profits online course or check the Events Calendar and Who Can Help? directory to see if there is a face-to-face training near you, or someone who can help you with this piece of a business plan.

How long does it take to become profitable?
We typically hear from farmers that it takes 5-7 years to be profitable. There are certainly exceptions; farmers who start with minimal investments on leased land may be able to achieve profitability in the first or second year.This question is also dependent on your definition of profitability. If you expect to have off-farm income indefinitely, your definition of profit might be that the farm covers all its variable costs, some fixed costs, and generates enough profit for re-investment in the farm, but you do not expect it to pay you or contribute to your retirement or other savings. In this case, you might be able to lower the number of years to profitability to 3-5.

Years to profitability will be greatly impacted by your purchasing decisions as you build your farm. If you suffer from “Shiny Equipment Disorder”, and buy brand new tractors and implements for your small start-up operation, it is possible you will never achieve profitability.

How can I start to put together estimates of potential costs and revenue?
Good question! It’s not easy, but you probably already know that. We’ve listed some of the best enterprise budgets we (or other people) have collected online, along with advice on estimating costs and revenue, within the Choosing an Enterprise tutorial. The final step of deciding what to grow is to ask the question, but Does it Make Financial Sense? Here you’ll find lots of suggestions and links to help you, but there are just no easy answers here. You will need to do a lot of research and leg work to get accurate ideas of the profit potential–for your farm and your markets–of what you want to grow.Remember that the first year is the hardest, because you have to create all the numbers from scratch, but after that you’ll always have real numbers to work from, and to improve upon, so that by year 4 or 5 you will have a clear idea of your farm’s profitability. Keep in mind too that it’s a good idea to manage your expectations: most farms take 5-7 years to achieve profit. Be sure to plan for other income sources to keep you going through start-up.

What records should I be keeping?
There are many different types of records farmers keep. Records are critical for steering your business to success; otherwise you’re driving blindly and could be heading for a cliff. But you don’t need to go overboard with tracking. Here’s a sampling of items successful farmers record:Daily or Weekly:

  • Weather (precipitation, max and min temps, frost dates)
  • Purchases/Expenses – assigned to relevant enterprises or overhead
  • Revenue from product sales – assigned to relevant enterprises and market channels
  • Time spent on various tasks (weeding, marketing, etc)

Annually:

  • Soil organic matter, plant diversity or other soil improvements
  • Net Worth (Balance Sheet)

Livestock Farmers:

  • Weaning weights
  • Feed consumed
  • Vaccinations and Medication
  • Birth dates
  • Calving (or kidding or lambing) success rates
  • Paddock grazing duration and intensity

Horticultural Farmers:

  • Practices used in any given field (compost application, tillage, cultivation dates)
  • Seeding/Transplanting dates
  • Germination rates
  • Harvest date and weight of each crop
  • Pest management practices used
  • Comments re. produce quality, customer preferences, quantity unsold
What recordkeeping options do I have?
Paper Records
Small farms and many businesses just starting out find that paper notebooks and folders meet their needs. Keep all sales receipts in one folder, expense receipts in another, maintain a capital asset depreciation log, and keep notebooks for farm yield or other data important to the year. The advantage of this system is that it is simple and easy to do. The disadvantage is that the data is not well organized so when you need farm information you often have to sort through piles of paper and do all computations by hand.Cornell Farm Account Book
Cornell and many accounting services have pre-formatted account books with categories common to agriculture and additional areas for yield and capital asset data. These are typically of nominal cost ($10-$20). The advantage of the farm account book is that it is easy to understand and the information is well laid out in case you need to access it later. The disadvantage is that the information may not be laid out how you as a manager would like it, and it is still a hand-entry accounting system so entering farm information may take several hours per week. To order the Cornell Farm Account Book from CUP Services, a division of Cornell University Press, call 800-666-2211 or e-mail orderbook@cupserv.org.Excel Spreadsheets
If you can use a basic spreadsheet in Excel or a similar program, this is a good compromise between paper systems and more sophisticated recordkeeping programs. Many new farmers start out with a simple spreadsheet like this one from Cornell (.XLS), which is intended for high tunnel crop producers but can be adapted for any operation. If you don’t need to generate invoices and have a relatively simple, small operation, a spreadsheet like this may serve your needs well for many years.Quick Books
The most common software program for financial management is Quick Books; however, there are more expensive industry-specific programs specifically designed for dairy farms or wineries, for example. (Try searching online for “winery financial management software.”)

If you are intimidated by QuickBooks, try their SimpleStart program from Intuit (you’ll find this by googling it). It’s free and is a good way to ease into using QuickBooks. If you are ready to upgrade at any point, you’ll be able to transfer your records seamlessly into the full QuickBooks program. Check out your local credit unions, banks, and Cooperative Extension to find out if they offer any QuickBooks trainings.

AgSquared
This free and very easy-to-use software is designed to serve the recordkeeping needs of small farms. In its 1.0 version, it is primarily for vegetable farmers to track field management, labor and equipment use, planting and harvesting schedules, and crop yields. Future versions will include financial recordkeeping, and functionality for livestock farmers to keep records on their herds or flocks.

How do I track all this information and still have time to farm?
The key is to set up systems that work for you. Some of the best record-keepers we know set up their systems–whether paper notebooks, excel spreadsheets, or fancy software–in the winter months and spend just 10 minutes a day during the insanity of the growing season to stay on top of recordkeeping.One thing is for certain: the more time you invest up front in setting up systems that will work for you, the easier it will be to sort through everything at the end of the season, or at tax time. A cardboard shoebox may seem convenient when you can just open the lid and throw things in in May, but come December you won’t want to face the mess of paper scraps that will confront you, and therefore you won’t have information to determine which crops were profitable or what to grow next year.

Continue on the to the Improving Profitability Tutorial>>

Profitability, part 1

This important video is the longest in our series, so we’ve split it into 2 parts. The first has subsections on Making a Living and Labor. Many new farmers resist thinking of their farm as a business, and therefore neglect to consider profitability. Even if you have outside income that allows you to farm on the side, for long-term sustainability of your efforts and to be fair to farmers who live solely on farm income, it’s a good idea to examine your profitability. Use the Achieving Profitability tutorial to learn more about how to get your farm in the black and keep it there.

Visit the video gallery to “Meet the Farmers” and view other videos.

Profitability, part 2

This second video has subsections on: Pricing Your Product, Keeping Records, Growing Your Enterprise, and Measures of Success.

Visit the video gallery to “Meet the Farmers” and view other videos.

Continue on the to the Improving Profitability Tutorial>>