This winter I have been sitting down with a lot of farms that are asking the question: “is this a product we should continue raising?” or “ is this market outlet worth keeping?”. Unfortunately, these same farms don’t often have the records or historical financials documented that provides the needed information to answer this question. Small farm or big farm, it doesn’t seem to matter.
For the ten years that I have been involved in agriculture in Vermont there have been plenty of publications and programs touting diversified agriculture and direct marketing of farm products. My background in biology and ecology has made me familiar with the claim that diversified systems can be more stable than specialized systems. Stable systems, in the sense, that they are more predictable. Put another way, they are less likely to suffer severe consequences from any one unexpected event. On the farm we see diversified systems with the development of multiple products like beef, broiler chickens, fresh produce, fluid milk or valued added dairy products. We also see one product sold through diversified market channels. One farm may sell beef via live-weight sales to the auction, ½ carcass frozen cuts direct to households and federally inspected product for wholesale accounts. Part of the “diversification” mantra assumes that one “unexpected event” will likely influence one of the enterprises (or market channels) but the other elements of the business will remain out of harms way.
OK, I can buy that logic. But there is one huge element of diversification that is left out of the publications and most start-ups. How do we keep track of all this stuff? The answer, ACCOUNTING and RECORD KEEPING SYSTEMS! If you are still reading after the last lines reference to accounting then you are well on your way to success. Diversified systems are complex and your administrative set-up needs the capacity to handle this complexity. A diversified farm needs records system that can give the manager information on distinct enterprises. Without that accounting and records your business will be subject to one major risk factor that will impact the entire business. This ultimate risk is your inability to make informed decisions guiding the business.
The concept of tracking multiple enterprises within one business is not a new concept. A manager has a variety of options that could be used to isolate your enterprises. You might base your decision on a variety of factors like your ability to enter accurate data in timely fashion, frequency of sales invoices, frequency of expense transactions, preference for computer based programs, inventory management requirements, number of outlets sold to (this number will be high for CSA farms managing transaction from dozens to hundreds of customers), and the number of distinct enterprises. Regardless of how you compile your data you can follow some basic suggestions to ensure you can get accurate data into these systems:
- Track Your Income for Specific Products or Categories
- For wholesale accounts, the invoice trail makes this easy. All products and their value should be clearly listed on a delivery or invoice.
- Direct Sales: Only a few farms are running Z reports on the cash register. If you take product to a farmers market you need to track how much you sell. The easiest way is to record the starting inventory at the beginning of the day and the ending inventory after the market. Keep this on record for a later time. You can use your product prices to calculate how much you sold of each product (or product category) .
- Cash Sales: Keep a clear log of cash sales with a notation of which outlet they came from. This is especially important if you want to evaluate the performance of specific outlets. I have been at several business planning meetings when managers pull out their notebook of weekly sales at 3 or 4 farmers markets they attend. Within 5 minutes we have used the data to decide which market to drop next year and which one to invest our new-found time into. (Remember, the managers that avoid accurate tax documentation of cash sales are often lacking vital information that is needed to base decisions upon.
- Track Expenses; the easy ones
- Develop a tight system to “catch” all expenses. Create space in your file cabinet for folders to save all the receipts. Once you have a place to put them you won’t be collecting loose papers on your truck dashboard, back pockets and wallet sleeves.
- Identify which enterprise an expense is purchased for. You can code the paper receipt, make a note in your checkbook, or identify the enterprise in a software program.
- Track Expenses: the tricky ones
A. You will have expenses that overlap multiple enterprises. Taxes, labor and machinery repair are just a few. It would be a good idea to find additional training on enterprise analysis. There are several ways to take your property tax bill and “divide” it among various enterprises.
4. Successful Accounting
A. Make the time for accounting or find someone else that can. Your business needs this activity executed even if you don’t want to be the one doing it. If needed, hire an employee with this skill set or hire a part-time bookkeeper. If you set about to do it yourself, do yourself a favor and pick a good time. At the “end of the week” or the “end of the day” usually results in “it didn’t get to it”. Pick a time when your brain is fresh and you can count on not being interrupted.
B. Paper based tracking is a convenient way to record information. Paper based systems are not so good for analysis or reporting. It relies on manual calculations to aggregate the information. Computer systems have a great capacity to analyze and report on information. These systems, however, don’t put information into themselves automatically. Managers need to make the time, learn the skills or find someone else that makes sure the system has logged all the business activity.
Once you have a good accounting and records systems set up, you will be able to collect and analyze the performance of this complex system. Diversification can be a nice tool to manage risk for your farm as long as you can evaluate the cost/benefit of each component in this business. Seek out conversations with other farm managers, watch for Extension programs on this topic and consider finding a farm accountant specialist to ensure that your diversified system has a strong records system to guide management.