Part IV of Financial Management on Black Sheep Farm
In this “episode” of how to manage your finances with Brenda of Black Sheep Farm, we learn how to figure out what you’re actually paying yourself.
Now that you’ve gone to all the trouble of making a budget and tracking your expenses, what do you do with all this information? It’s time to evaluate your finances! First of all, schedule some time for this, make yourself a strong coffee/tea, and have a snack prepared. And try to stay off the internet. It can be easy to get distracted, which will waste all your record keeping time!
Ideally, you should find the time, 2-3 times a year, to evaluate how your spending has been going, but this is pretty rare. Depending on when the busy periods of your farming season are, you should schedule in some financial evaluation time as soon as things calm down. For me, this is in early December, after I’ve finished the vegetable CSA season (end of October) and making cedar wreaths (end of November). I would also recommend doing this before making any large out-of-budget expenditures, so you know exactly what financial position you’re in.
Open your Budget and Expenses spreadsheets. In the sample Budget from blog post #2, I titled a column ‘Actual’. This is the column in which you’ll be entering the actual numbers for the year. Depending on how you set up your Expenses spreadsheet, this can be some simple copying and pasting of dollar amounts (if you’re copying cells that have equations, remember to paste value only). If you don’t like to flip back and forth between windows, you can print out just the ‘Balance Sheet totals’ section of your Expenses sheet and then enter them into your ‘Actual’ column.
You can even set up links between the Budget and Expenses spreadsheets so the ‘Actual’ column updates automatically with the latest totals from Expenses (though this can be problematic if you move files around and/or share them with numerous people who make changes, as links may be broken). If you choose to go the static (non-linking) route, note the date to which your Expenses are up to date.
Now that you have ‘Actual’ costs right beside your ‘Budget’ costs, you can see how close or far you are from your expectations. Adding a ‘Difference’ (‘Budget’ minus ‘Actual’) column shows you the exact amount. And depending on what time of year you’re doing your evaluation, you can see if you’ve got more or less money to play with for the rest of the year.
To make it easier to see if various enterprises are making money or not, I add some more columns beside the ‘Income’ section: ‘Budget Expense total’, ‘Actual Expense total’, ‘Net Budget’, and ‘Net Actual’. For the totals per farm income source, I put ‘whole farm’ expenses, like vehicles, equipment, marketing and labour, all under the main farm income source, the vegetable CSA. If another area is a significant user of these things, you may want to parse it out to get a more precise picture of how much it costs to earn income from that farm product. For example, maybe vegetables take 70% of the vehicle expenses and the various meats each take 10%. You may not even attribute both vehicle expenses to the farm, but only one of them if, for example, your partner uses the other to commute to his/her off-farm job.
As noted in a previous blog post, a penny saved is a penny earned! For this sample farm, some big ticket items, like a chicken tractor, cost a lot less than budgeted because it was built from mostly found materials. “Found materials” you say? There are so many places you can find building materials that aren’t necessarily a hardware store or lumber yard. Find out where your local dump and scrap yards are. Repurpose items around the farm that aren’t being used to their full potential. Habitat ReStores are a good source of items. Also, look through online postings to see if anyone’s offering materials for the price of pick up or tear down. Talk to farmers in your area who may have leftovers or older equipment that they’re willing to sell or give away. Go to farm auctions and estate sales, but do your research first and know your price limits or the pace of an auction may get you in trouble! And consider the many uses of pallets.
Essentially, the net amounts, budgeted and actual, are your take home pay. You can add another couple columns: % Budget and % Actual. Here, you can calculate what percent of that farm product’s income is your pay. In this farm example, less than 10% of pork sales are earnings, while laying hens (income from both eggs and meat) are almost at 50%! This is where you start evaluating if you want to keep, grow, or decrease, a particular farm enterprise. Perhaps you can cut back on costs, or increase production for economies of scale (don’t assume this is always a good thing). Or maybe it’s perfectly ok that one enterprise isn’t as financially efficient because you really love doing it. It’s just good to know exactly where everything stands.
You can also calculate your hourly wage now. It can be hard to determine exactly how many hours you work in a year, but you could say an average of 40 hours/week over 50 weeks of the year, which totals 2000 hours of work. That gives you a budgeted hourly wage of $2.24 or an actual wage of $5.36. If your farming is super seasonal in nature, giving you 3-4 months for off-farm work, then maybe your total hours are 50 hours/week over 36 weeks, which totals 1800 hours. Perhaps after seeing these hourly wages, you realize that you need to price your products completely differently. Start with the hourly wage that seems reasonable (perhaps $17/hour) and add that in as your labour expense. For 2000 hours, that’s $34,000. Then come up with a really good marketing idea to sell your farm products at a price where they can pay a real wage.