Enterprise Analysis. Determining Profit, Risk & Scale

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1 Enterprise Analysis Determining Profit, Risk & Scale Holistic Management International 5941 Jefferson St. NE, Ste B Albuquerque, NM

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3 Holistic Management A whole farm and ranch planning system and decision making framework Better management of human, financial & natural resources Obtain sustainable environmental, economic, and social benefits (triple bottom line) Natural Financial Human

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5 Key Points to Take Home To analyze your enterprise you need to: Know or get basic production costs Perform basic math Analyze information/numbers Make decisions based on your Holistic Goal Monitor/Adapt Natural Human To have a successful enterprise, focus on profit rather than production Financial

6 Management Challenges Management Challenges = Profitability Challenges 1. Do you know what your profit margin is? 2. Do you know what your limiting factor is? 3. Do you know what your unfair advantage is and how to capitalize on it? $100/hr thinking results in sustainable ranches/farms

7 Holistic Financial Planning Make financial decisions toward your whole farm goal Facilitate important conversations Analyze your enterprises Assess potential new enterprises Plan for profit upfront Calculate a cap for all expenditures Prioritize expenses to reinvest in your operation Monitoring your plan proactively

8 Profit vs. Production Traditional Model: I E = P Holistic Financial Planning: I (P)P = E

9 Profit vs. Production Be a price maker not a price taker Invest in your business prioritize expenses I (P)P = E Top Priority Investments Maintenance (Maintaining) Inescapable

10 Profit vs. Production Profitable, synergistic enterprises Production practices that increase profit Investing in the business and reducing liabilities and depreciating assets

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12 Enterprises = Income

13 Enterprise Analysis Which enterprises contribute most to overhead AFTER they have covered their own expenses? Direct Income Direct Expenses = Gross Profit Simple, Easy Way to Analyze & Compare Risk Scale Profit How do your enterprises rank in each of these categories?

14 For each enterprise: Plan Income Project income based on past history or appropriate estimates. DO NOT assume 100% of product will be sold. DO NOT use best sales year data as the norm. Compose a plan for best, average and worst years Will any off farm income be used? Important conversation don t assume!!!!!

15 15 Plan Income

16 Plan Income Income ABC Farm July August Sept Total Flowers 100 $1000 $1000 $1000 $3000 Vegetables (see worksheet) $2000 $1000 $1000 $4000 Total Income $

17 Plan Income Income is influenced by a host of production decisions: Genetic Soil Management Need for inputs Planting & harvesting practices (calving and weaning dates) Market Venues Are the production decisions you make costing you money or making you money? 17

18 Know Your Numbers What are your biggest expenses? Feed Soil Amendments Depreciation Breeding/genetics/product quality & quantity Labor Overhead tied to enterprise Can you pay yourself for labor and management? Could you afford replacement labor and still be profitable? What efficiencies and production practices could reduce inputs & expenses? Additional $375/cow 18 Info from U of Minn FINBIN Financial Database

19 Gross Profit Analysis Which enterprise contributes the most to overhead expenses? Gross Profit (Enterprise) = Enterprise Income Enterprise Specific Expenses 19

20 Plan Income for Bees Income 3 hives of bees will produce 150 # of honey total. The price per pound is $ $1,500 Direct/Variable Expenses Replacement labor costs (4hrs/week@$10/hr for 4 weeks) $ Sugar for feed $7.50 Parasite and disease control $82 Packing supplies $ Amortization of shed and equipment $300 TOTAL EXPENSE $ Gross Profit $750.50/3 = $ per hive START UP COSTS $3000 for purchase of bees, protective clothing, honey extraction equipment, beekeeping equipment and adapting a shed to hold the equipment. Expected life of 10 years. 20

21 CSA Enterprise Analysis Income from 2.5 acres $550 each $33,000 Direct/Variable Expenses Hired labor (40hrs/week@$10/hr for 16 weeks) $6,400 Replacement labor costs (80hrs/week@$10/hr for 24 weeks) $19,200 Reemay $1,000 Tomato posts $100 Seeds and cover crop $2,000 Plugs $500 Fuel for irrigation, BCS and replacement parts $500 Harvesting and wash tools $100 Pest control $200 Fertility cost (trucking compost from neighbor farm) $500 Amortization Costs (see below) $1,310 TOTAL Direct/Variable Expenses $31,810 Gross Profit $1,190/2.5 ac = $476/ac 21

22 Carrot Enterprise Analysis Income from 2.5 acres 40 25# $43.75/bag per ¼ acre (retail sales for.5 acre) $ 3, # $25/bag per ¼ acre (wholesale sales for 2 acres) $32,000 Total Income $35,500 Direct/Variable Expenses Hired labor (40hrs/week@$10/hr for 16 weeks) $6,400 Replacement labor costs (80hrs/week@$10/hr for 24 weeks) $19,200 Reemay $1,000 Seeds and cover crop $2,000 Fuel for irrigation, BCS and replacement parts $500 Harvesting and wash tools $100 Pest control $200 Fertility cost (trucking compost from neighbor farm) $500 Amortization Costs (see below) $1,310 TOTAL Direct/Variable Expenses $31,210 Gross Profit $4290/2.5 ac = $1716/ac 22

23 Enterprise Analysis Which Enterprise must has is more more sell risky? its flexibility attainable product and at yields? a higher opportunity price? in regards to management? Enterprise A Enterprise B

24 Effect of Holistic Management Land Fertility/ Effective Production Practices 0 Increased Profit Decreased need for input/labor Time 24

25 Step Eight: Net Worth & Profit Strategic Growth Cow Herd (5-10 year program to double grass/stocking rate) # of Cows Income/Cow $405 $405 $405 $405 $405 $405 Variable Cost $250 $250 $250 $250 $250 $250 Gross Profit $155 $155 $155 $155 $155 $155 Overheads $110 $ Net Profit/Cow $45 $63 $76 $86 $94 $100 Profit/Ranch $4,500 $7,560 $10,640 $13,760 $16,920 $20,000 Increase (Assuming overheads remain same of $11,000 then you divide additional animal units into that number for overheads which then changes your net profit per cow). Multiple net profit X number of animals for ranch profit. Divide increased profit by old profit to get percentage increase.

26 Enterprise Analysis Which enterprises contribute most profit to cover overhead? Direct Income Direct Expenses = Gross Profit Simple, Easy Way to Analyze & Compare Risk Scale Profit

27 Beginning Farmer/Rancher Development Program Session One Introduction to Whole Farm/Ranch Planning Session Two On Farm/Ranch Decision Making, Time Mngmnt Session Three Increasing Farm/Ranch Profitability Session Four Creating a Whole Farm/Ranch Financial Plan Session Five Creating a Marketing Plan Session Six Business Planning Basics Session Seven Leadership & Communication Skills Session Eight Land & Infrastructure Planning Session Nine Improving Land with Livestock, Soil Building Session Ten Soil Fertility Basics & Environmental Impact

28 Angela Boudro, Certified Educator Holistic Management International