Keeping Track of Finances

Session 5

Keeping Track of FinancesMick Gilliam, MU business

development specialist

With thanks to Mary Sobba, MU agricultural business specialist

Financial management of your agri-business

• Key to a sustainable future for you and your farm

• Basic skills everyone needs

• Vital part of a business plan

• Most important to lenders and investors

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Regular financial duties

• Paying bills and payroll• Writing correspondence• Scheduling money flow — in and out• Reviewing and paying debt obligations• Depositing money• Allocating funds to investments, operating

and checking accounts or other needs• Reconciling checkbook (important to find

errors)2

Financial statements show the big picture

• Balance sheet• Income statement, also known

as:– Revenue and expenditure report– Income and expense report – Profit and loss report

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Key financial terms

Balance sheet: Statement of financial position that shows the assets, liabilities and net worth of the business at a given point in time.

Assets: Everything the business owns, including such items as cash, inventory, prepaid expenses and equipment.

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Key financial terms

Current assets: What the business owns that is expected to be turned into cash within one year, such as accounts receivable and inventory.

Non-current assets: Intermediate assets have a moderate expected life of over one year, but not more than seven years in most cases. Fixed assets are used to generate revenue for the business such as buildings and land.

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Key financial terms

Depreciation: Process of allocating cost of a fixed asset, such as equipment, to the period in which it benefits the business, “writing off”its cost over its useful life.

Liabilities: What the business owes to creditors and others who supply funds that must be repaid. Debt describes an ongoing liability, such as a bank loan.

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Key financial terms

Current liabilities: Obligations due to be repaid within one year.

Non-current liabilities:Intermediate obligations are due to be paid

over a period longer than one year, usually within three to seven years.

Long-term obligations are due to be repaid in a period longer than seven years. This is also referred to as long-term debt.

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Key financial terms

Owners’ equity: The value of the owners in the assets of the business. The equity of the owners is the assets less the liabilities. This is also called net worth.

Net profit: The amount remaining after deducting all the costs of doing business.

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Key financial terms

Gross profit: Sales minus the cost of goods sold — the cost of purchasing or producing the goods sold during that accounting period.

Income statement: Summary of revenues, costs and expenses recognized during an accounting period. Also known as a profit and loss statement, P & L, income and expense statement.

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Cash vs. accrual

Cash: Value of transaction when cashflows in or out of business.

Accrual: Value of transaction at the time of transaction, but not necessarily when cash flows in or out.

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Sale made Payment

Purchasemade

Paymentmade

AccrualAccrual CashCash

Time

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Balance sheet

• Snapshot of financial position at a specific point in time. Shows how funds are invested (assets) and financing methods used (liabilities and owner’s equity).

– Typically prepared at the same time each year

– Provides “book value”

– Required by banks to assess liquidity and indebtedness

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The balance sheet

• Shows what company owns: Assets

• Shows what company owes: liabilities

• Shows bottom line: Net worth

• Shows financial condition at a point in time

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Assets = Liabilities + Owner equity

• Assets: Cash, inventory, accounts receivable, equipment and land

• Liabilities: Accounts payable, loans, mortgages and installment debt

• Owner equity: Owner’s investment and profits put back into company

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Balance Sheet

Review and discuss the balance sheet example provided

• What does the balance sheet show?

– What is the trend of this business over the period of the report?

– Is liquidity increasing or decreasing?– What judgment can you make about the owner’s

reinvestment in the business?

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Income statement

Analyzes:• Did you make money?

• How did projections compare with actual?

• Can you meet financial obligations in a timely fashion?

• What is generating income?16

Income statement

• Summarizes events that happened over set period of time

• Report of revenue and expenses

• Required for tax purposes

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Income statements show bottom line

• Shows net profit or income

• Shows cost of goods sold

• Shows operating expenses

• Shows revenue

• Reveals profitability of business in a given period

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2003 2004 2005 2006Sales Livestock Sales 5329 62432 72724 75257 Grain Sales 157233 142205 177530 213228

Gross Sales 162562 204637 250254 288485

Operating Expenses W ages 27500 31350 35739 40742 Equipm ent Hire/Contract Labor 5400 6243 7700 9031 Seeds and Plants Purchased 15000 15600 16440 18150 Telephone and Utilities 1200 1275 1477 1659 Insurance 2600 2800 2900 3100 Maintenance and Repairs 10200 9503 9572 8250 Fuel/O il 8250 9160 9783 10351 Depreciation 10400 9600 8800 8400 Rent Expense 6000 6000 8500 8500 Vet/Medicines 480 522 491 566 Chem icals 2040 3226 3818 4050 Vehicle Expenses 4576 4912 5638 5236 Fertilizers and Lim e 12240 11404 11486 9900 Equipm ent Rental 1750 1633 1914 2007 Payroll Taxes 5600 6400 7300 8300 Local Taxes 1500 1530 1566 1591

Total Operating Expenses 114736 121158 133124 139833

Net Operating Incom e 47826 83479 117130 148652 Interest Expense 27400 34684 47056 65222

Net Profit Before Taxes 20426 48795 70074 83430

INCOM E STATEM ENT

The next step

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How do you keep track of all these numbers? I just want to operatemy business!

You need a good accounting system

• Choose one that works for you. Test run a program.

• Be sure to get the right information at the right cost.

• Look for good internal control.

• Choose a system that includes tech support and training.

• Keep it simple.

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You can still use pencil and paper

• Missouri farm tax records are good for this, and most states have their own version.

• Includes– Income and expenses– Depreciation schedule

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Why use a software program?

• Takes less time than manual bookkeeping

• Generates reports for you

• Reduces redundant tasks

• Keeps track of inventory

• Simplifies payroll

• Automates taxes

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What are your needs?

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• What functions do you need the system to perform?

• What do other farming operations use?

• What resources are available and which are needed?

• Will your accountant be able to use your files at the end of the year?

Tips for purchasing software

Review: • Hardware requirements

• User-friendliness: ability to modify

• Support services and training

• One-time payment or subscription (trial use)?

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Software packages

Popular options include:• Spreadsheets• Quicken• PC Mars• QuickBooks

Disclaimer: MU Extension is not recommending or endorsing any of the following products or companies. We are simply interested in helping you with your search for tools to help you run and manage your business better.

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Spreadsheets

• Included on most computers

• Can easily be set up to replicate a pen-and-paper farm record book

• Allow quick and accurate totals

• Cannot automatically generate reports,such as balance sheet, P&L or others

• Some available free at MU AgEBB Web site,http://agebb.missouri.edu/download/index.htm 27

Quicken

• Built for personal finance• Easy to learn• Flexible• Inexpensive • Includes features that track investments• Trial version and training available

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Quicken

• Does reports

• Provides simple income and expense records

• Drawbacks include:• limited support for invoicing and receivables• no inventory system

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PC Mars

• Based on single-entry accounting system

• Can be set up for cash or accrual

• Reconciles with bank accounts and loan balances

• Relatively easy to use

• Can divide farm into separate enterprises

• Includes payroll options30

PC Mars

• Has automatic inventory capabilities

• Offers built-in budget and cash flow features

• Includes many report options

• Costs more (member and non-member prices)

• Has demo versions available

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QuickBooks

• Built for small business accounting• Easy to learn• More features and options• Single or double entry• Extensive reporting capabilities• Cost is reasonable• Trial and entry-level versions available

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QuickBooks

• Offers training• Includes these standard features:

– Payroll system– Inventory– Invoicing– Customer statements– Accounts receivable– Online banking, and– Class tracking

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QuickBooks

• Benefits for farm accounting:– Good for tracking side businesses– May be useful for tracking farm inventories

• Downside: – No investment tracking features.

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Farm financial tools online

agebb.missouri.edu/mgt/mofar

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Questions?

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