February 2, 2017 – CRAFT Farmer Round Table – “How to Not Spend Money, A Percentage Comparison” – Facilitated by Cedar Johnson & Ben McCann of Goldfinch Gardens

What is a Farmer Round Table? They are open, farmer to farmer discussions geared toward a specific advanced farming topic, facilitated by one of our own CRAFT members. It’s a place to share ideas and experiences on a deeper level than we can get into at the CRAFT farm tours.

We asked CRAFT members to bring their percentage of expenses to gross income, then a further breakdown of expense categories as a percent of gross. Some useful categories we asked them to include were be labor, utilities, supplies, repairs, and any new projects or improvements. We also discussed how folks deal with large purchases (such as new equipment) when looking at their numbers.  And lastly, how folks approach budgeting for the year.

Ben & Cedar of Goldfinch Gardens, our facilitators for the evening, shared with us a technique for thinking about expenses: If all of your expenses are a circle or “pie”, the whole pie represents the farm “gross income”, where as (ideally) half of the pie represents your expenses and profit (or “net income”). There was much discussion on on-farm income that is reflected in taxes, vs. the reality of on-farm income. The general theme of the night was that there’s a lot of ways to look at numbers, and the answer is to simplify. It was interesting to see how similar percentage of expenses vs. percentage of profit was for each of the farmers involved in the discussion. Read below for highlights. Some of the farmers present attended our Holistic Financial Planning Workshop earlier in the year, which very much added to our discussion.

Highlights from the Discussion

  • The accumulation of depreciating deductible expenses over the years throws off on-paper profit/loss ratios – in order to look like you’re actually making money (or not, depending on your goal) farming, you really need to play with those numbers. For example: claiming an expensive tool in one fiscal year could be a good decision if you’re trying to show your farm is profitable (for tax or loans reasons) in later years.
    • If you want to show a profit to take advantage of various tax exemptions, you can take advantage of the Small Business Accelerated depreciation to “clump” expenses, so you can be particularly in the black in chosen years.
    • The “Costs of Goods Sold” area of expenses, by far the most robust and all-encompassing, was approached in many ways. Many of the numbers were not relatable as they didn’t have the same categories encompassed in them. This just goes to show – there are many ways to look at numbers.
      • Costs of Goods Sold was loosely defined as, “anything that if you produced more, you’d need more, if you produced less, you’d need less.”
      • Everyone has a different approach – in order to keep track of miles, for example, some kept a notebook in the car, while some admitted they made them up, with ball-park odometer readings.
    • It was agreed that, although tax numbers can be redistributed and re-calibrated to fit needs, keeping track of percentages is important to figuring out what is actually going on on the farm.
  • Generally all of the farmers involved in the discussion with multiple years worth of data showed a profit percentage of 25-35%.
    • It was brought up that there are certain claimed profit standards for different forms of farm production: with vegetables, a 30-40% profit margin is a good place to be. If you’re doing higher than that, you’re doing really well, lower than that you have high expenses (hopefully as a result of startup or inefficiencies that can be improved upon.) For livestock, the number is 15-20%.
    • A basic budget for establishing a vegetable farm & vegetable farm financial benchmarks from Iowa State University can be seen here.
      • An interesting comparison of how scale affects vegetable farm expenses is shown in Fresh market vegetable farms at three scales of production by John Hendrickson, UW-Madison Center for Integrated Agricultural Systems
  • Labor costs were all between 12-15%.
    • None of the farmers factored in their own salary, just hired help. This means that any workman’s comp that is carried by the farmers does not cover themselves, as they are not on salary.
      • It was suggested to set a salary and work your expenses around that. What areas could be trimmed to fit our profit/salary goals?
    • One farmer uses the Living Wage Calculator established by MIT to calculate appropriate pay – this tool allows you to factor in things like room & board and food into the wage you’re offering, organized by county.
  • Investments in things like infrastructure could be thought of as expenses, but could also be thought of as investments (leading to future profit), which is really what you should be doing with your profits. This is hard to quantify.
    • Most farmers really had to learn to control themselves because it’s so fun to go buy tools that can be written off later. Some questions to ask yourself: Can you borrow something? Can you figure it out without buying it? On the flip side, there’s a balance to buying before the lack of something affects your efficiency.
    • There were creative options presented about how to avoid spending exorbitant amounts on things like pest control. One farmer suggested the investment in beneficials to attract pollinators and beneficial insects for competitive exclusion, as opposed to paying all of the money they usually do for organic pesticides.
  • The Holistic Financial Planning Framework allowed participants to frame expenses in a different way than the Schedule F IRS-based expense reports — instead, it was based on a month-to-month comparison, which farmers agreed gave them a much more ‘holistic’ framework for how their farm was operating seasonally.
    • The HFP workshop also suggested that household expenses get lumped into farm expenses. For example, if you have a home phone that you also use for business, you do not count those expenses in your farm expenses (assuming you would have a house phone anyway). This makes the business look better, but it may not provide an adequate reflection of reality.
    • The HFP framework introduced one way to look at profit: think of it as an “uncompromising percentage” or set amount of your gross income. This way, you can adjust your expenses to match the profit you want to make and not the other way around. We visualized the whole “pie” as gross income, and (ideally) 50% of it as “expenses” and 50% as “profit” or “net income.”
CRAFT Farmer Round Table – How to Not Spend Money