Farm Pro PA: Horticulture Workbook

Workbook Instructions

When using the Farm Pro PA: Horticulture Workbook, you should begin with the Cash Flow tab. You will need to have your records in a format that will produce the information required to complete the Cash Flow tab. A cash flow is basically your checkbook with more details included. For example, you need to know where each check or deposit for sales originated. Did the income come from sales of finished cattle, calves, yearlings, or crop income? In the case of horticulture, is the income from apples, cherries, vegetables, or other sources of sales? Providing as much detail as possible will only benefit your use of these tools for financial analysis.

Cash Flow tab

Beginning on the left side of the spreadsheet, list all sources of income, including any income from crop insurance payments or government program payments. These income sources may be realized throughout the course of the year. Enter any income realized from these sources (funds from loans are not considered income) each month as the income is derived. For example, you may sell apples in every month of the year but only sell calves in a two-to-three-month period. Each month has a column to enter these sources of income. You may sell production to several customers in any given month, for our purposes here, total the monthly sales and enter that figure in that month. We do suggest you keep records of sales to each customer for analysis to be used in the future. The totals will be calculated on the right side of the spreadsheet.

Below the income portion of the spreadsheet is the operating or variable expenses portion. These expenses are divided into five categories: crop expenses, repairs and maintenance, fuel, gas, and oil, labor and other. These are currently populated with topics, but these may be changed. If you do change any topics, they should change in the following tabs. Again, enter the figures in the month the bills were paid.

The next portion is debt related expenses. Keep in mind that interest payments are tax deductible but, principal payments are not deductible. These topic titles may also be changed to fit your operation. This portion deals with interest expense only.

The following portion is the capital debt items. Even though principal payments are not tax deductible, they do need to be covered with income from the farm business. If you used the Capital Purchases and Improvements workbook, that information should be entered for the month the payments are made in this and the previous portion of the spreadsheet.

 The total net cash flow is the difference between all income and all expenses incurred for the year. You may use the phrase “the bottom line.” This the result of the income and expenses for the farm business. You may have noticed there are no personal income or expenses or owner’s draw from the farm. The personal and farm should be kept as separate as possible and will be in the next portion of the cash flow spreadsheet.

The owner’s draw is the funds taken from the farm business to support the family living. This will be from the profits of the farm business.

Many farms have at least one person with off-farm employment. This income should be used to support the family and retirement investments. If the off-farm employment comes with health insurance, the farm will not need to support that expense.

The off-farm income portion also includes a place to list variable and fixed expenses. Again, these topic items may be changed to suit your personal situation. These items and expenses are not tax deductible and should not be included in any farm expense.

Depreciation 1 and 2 tabs

For accurate farm business analysis, you need to focus on economic depreciation. This tool contains two tabs for depreciation as many farms have a long list of items to depreciate. Remember, land does not depreciate.

To calculate straight line economic depreciation, record the purchase price and determine a salvage value. The salvage value is the value of the item when traded on the next piece of equipment or sold for cash or scrap. You subtract the salvage value from the purchase price and decide the number of years the item will be used. You then divide the purchase price minus salvage by the number of years you anticipated the years of use. For example: purchase price is $100,000 minus salvage value of $10,000 equals $60,000, divided by the anticipated years of life is 10 years ($100,000 - $10,000 = $90,000 ÷ 10 = $9,000 annual depreciation).

Many items with longer years of use (buildings and improvements) have a lower salvage value and it will probably cost the farm money to dispose of a long-term item such as a building. Equipment that is not used very much each year (tillage equipment) will have longer years of use. According to most farm management recommendations are to use five percent for buildings and improvements and ten percent for equipment. The tool allows you to group items and assign a salvage value percentage.

To use the Depreciation tabs, enter the current year you are using the tool. Then enter the item(s) and the year they were purchased. Then enter their cost (what you paid). If you traded an item when you purchased the piece of equipment use the price you paid. If you traded another piece of equipment that value is the same as cash paid for the new item. Record the estimated years of use which will be used in the calculations. There is a column for estimated market value. You should complete that information as it will be used in a following tab. After completing this information, the tool will make the rest of the calculations. These calculations are also linked to some of the following tabs.

Record of Liabilities tab

The record of liabilities tab allows you to keep track of your loans or liabilities and see them in one place. As with most liabilities, the categories are divided into Current, Intermediate, and Long-term. There is space to record the lender and the purpose of the loan. Then enter the date the loan began and the ending date. Enter the interest rate and the number of years the loan is for and the original amount of the loan.

You should use the Capital Purchases Workbook to provide the figures for the beginning balance for the three portions of the tab. The interest and principal paid are brought forward from the Cash Flow tab. The total paid will be calculated for you.  

These calculations will carry forward to the farm Balance Sheet and Income statements. All columns are totaled for a comprehensive look at your loans. Because leases are considered current liabilities, they are not included here.

Farm Balance Sheet-Market

As you have learned, the balance sheet is a snapshot of the farm at a specific date in time. Many lenders will base their calculations and loan decisions on the market-based balance sheet. Enter your farm name and the year for the current balance sheet. You will need to determine the market values for land, equipment and other assets which will require so research on your part. You will need to use the previous balance sheet to enter the figures for that year’s columns. The current year’s values are populated from the previous tabs. The depreciation value will combine the Depreciation 1 and Depreciation 2 tabs.

Farm Balance Sheet-Cost

Farm economists prefer using the cost-based balance sheet for farm financial analysis. We have provided a tab for you to calculate your own cost-based balance sheet. To determine the cost values, use the purchase prices for items such as land and equipment. The cost-based balance sheet requires less research on your part as you have the prices. The same directions as above pertain to this tab.

Personal Balance Sheet

We teach that your farm and personal finances should be kept separately. In lieu of these teachings, we are providing you with a tab for your personal balance sheet. No information is transferred from the other tabs into this sheet.

We know that owner’s equity on the balance sheet shows the farm’s net worth, but you should also calculate your net worth. This tab will allow you to do so.

Income Statement

Remember that the income serves as record over the course of the entire accounting period. The categories are carried forward from the cash flow statement. The depreciation is linked to the two depreciation tabs and the accrued interest comes from the balance sheet. The cash interest paid is from the record of liabilities tab. You will need to complete the inventories the farm has in the green section. This will provide the information to calculate the accrual accounting process. Accrual accounting provides better financial analysis than cash accounting.

Ratio Guidelines

This tab provides the information about 21 different ratios. This tool will not calculate all 21 ratios, but the information is provided in case you want to do so.

Ratio Calculations

The directions to calculate the 21 ratios are contained in this tab.

Ratios

We have used the provided information to calculate 11 different ratios most used in the lending industry. You will see red, yellow, and green highlighted cells with numbers in the red and green cells. The green cells indicate the business is strong in this area. Your number falling close to the red cell means the business is in danger in this area. Yellow means caution. The calculations are completed by using information from the entire tool and will provide the information you use to benchmark your farm against itself and other similar farms.

Information

This tab contains some obscure calculations used to calculate some of the ratios. As with other tabs, the green highlighted cells will need to be completed by you. For example, the opportunity cost of unpaid labor section contains two cells to be completed by you. How many hours do you work in a year and what is the value of your labor? Likewise, how many hours do you spend on management and what is the value of that time on a per hour basis? This information is included in some of the ratio calculations.

Summary

These tools are created for you and your farm’s use. The information you enter should be from well-kept records and as accurate as possible. A good record keeping system will serve your farm well and will make completing these tools less burdensome. Completing these tools on a yearly basis and keeping past versions will allow you to track the farm’s financial health over the years.

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