Whether you’ve been in business for 10 months or 10 years, you’ve probably turned over the calendar to 2017 with the goal of increasing profits. I know I have.
For me, I spent the last week of 2016 (when all my revenue had been accounted for, and the expenses entered), digging into my financials; looking at what went well, what didn’t, and how I want to increase profitability for the coming year. The past year was a time of transition and experimentation for me: I had two books published and I spent more time speaking at conferences and promoting the books. It was interesting to see how it all manifested itself in the numbers. The difference in the two books was stark – though I generated more revenue from the cookbook, the promotional costs for the cookbook, not surprisingly, were greater than the business book. While the time preparing for each event was more or less the same; for cookbook events, I also bought food and printed recipes. For The Farmer’s Office events, I just showed up. The measure for a successful event for each book is very different.
As I sifted through my QuickBooks data, I also realized I needed to make changes to how I tracked my financials. What worked before doesn’t make sense now that I have book sales and promotion. To get meaningful information, I reclassified many transactions.
For the New Year, I can make goals for how I want my business (and book sales) to grow, I have an improved system for tracking my progress, and I have a basis to measure my success.
If your goal is to increase the profitability of your business over the next year, then you need a plan to get there. And there’s a process to get there: To create that plan, you need a solid understanding of your business’s economics; and you may need to resolve to make some changes in your bookkeeping habits. (It always comes back to bookkeeping, doesn’t it?)
Here are 9 resolutions to help you tackle the financial management of your business and stay on track to improving your profitability.
#1 Make Time
Let’s face it, good financial management takes time… it takes time to keep track of all your invoices, pay your bills. It takes time to manage cash flow and make a budget for the coming year. And it takes time to analyze how your business is doing financially. If you’re not making the time each day for financial management and analysis, it’s not going to happen… because there will always be something more pressing – like feeding the chickens, setting up the irrigation system, or harvesting.
I find it helps to schedule time on the calendar. (In fact, much of my to-do list are appointments on the calendar with the time/date I will do them) If you want a little more help on creating a calendar, you can watch this webinar.
#2 Set up Systems
So you’re making the time; but for what? If you have a good system in place it can help to ensure that you’re effectively managing your finances. You’ll want to think about systems for both bookkeeping and time tracking.
In terms of bookkeeping, my favorite tool for bookkeeping is QuickBooks. The learning curve is steep, but once you have it set up, it can be a powerful tool to not only file your taxes, but also look at the profitability of your business as a whole and the different products you sell. You can also use excel or a paper ledger, but they won’t be as robust.
Obviously, I want you to track your financial data. But it’s also a good idea to track your time. Not only do you want to know in actual dollars, how much you’re earning, but it helps to know what that translates to as an hourly wage. Let’s say, you net $1000 at the farmers market (after paying for the cost of production) and $500 if you sell wholesale for the same product. Without considering your time, it looks like the farmers market kicks booty over wholesale. But let’s say you track your time, and the farmers market consumes 10 hours – between loading the truck, driving to the market, set up your stand, selling, breaking down, and driving back to the farm. On the other hand the wholesale only takes you two hours to load the truck and deliver. In essence, you’re earning $100 an hour selling at the farmers market, and $250 an hour selling wholesale. When you track your time, you see a very different story.
If you need help setting up systems, you can:
- Watch the QuickBooks webinars on my website
- Sign up for The Farmer’s Edge, and/or
- Read The Farmers Office.
#3 – Set Goals
Business people make money because they plan to make money. If you have a goal, then you can make a plan to get there. As they say, if you don’t know where you’re going, any road will take you. And if you know where you want to go, then you can find a path to take you there.
You can have different types of goals… you may want to reach a certain level of revenue. You may want to penetrate a new market, or build a farm-store. You may want to attack new customers to your CSA; or maybe your goal is just to buy a new greenhouse.
#4 – Create a plan
Once you’ve outlined your goals, you can create a plan. Let’s say, you want a third of your business to come from wholesale customers. If each customer spends $7,500 over the course of the season, then you’ll need about 14 customers. From there, you can figure out a plan to find them.
#5 – Track
I alluded to this earlier, but having a financial system in place is great, but you need to make sure you’re tracking the details of your business. How much are you spending on feed; tractor repairs or plastic mulch? In other words… set up a system, and then make it a habit to use it.
#6 – and Measure
You’ve got your bookkeeping system in place and you’ve tracked all your costs. You know where your money is coming from; you know how much time you’re spending on different chores. Now what?
First and foremost, you can track your progress towards to your goals. If you set goals to earn a certain amount of money, then you can measure your progress towards your goals.
You can analyze your costs of production to make sure you’re pricing your products correctly. If you understand what it takes to grow a case of tomatoes, then you can make sure that you’re pricing it correctly. You can analyze different sales channels to see which is more profitable.
#7 – Keep an Eye on Cash
During the busy season, it’s easy to put your head down and just work non-stop… but even when cash is coming in, it’s easy to lose sight of what you have. The timing can be off from when the bills are due and the cash comes in. It could be that you’re going to a farmers’ market on Tuesday, and you know that you’ll net a few thousand dollars, but you may have payroll the previous Friday and a mortgage payment due… too often, during the busy season, farmers stop paying attention and then get themselves in trouble.
#8 – Borrow Wisely
A few years ago, when we had the miserable winter here in New England, a local farmer lost two of his greenhouses. Instead of borrowing money to repair them, he took the undamaged sections of each one and glommed them together to create one greenhouse. He was adamant against borrowing money; and as a result, he went into the next growing season with half as much infrastructure.
On the one hand, good for him for not borrowing money. He’s risk averse, and he recognizes that. On the other-hand, he limited his production capacity by having only one greenhouse, and in turn limited his revenue earning potential. During the following off-season, he sold scrap metal because he hadn’t made enough money during the growing season.
Without a clear plan, borrowing money can feel scary for the risk averse (and I count myself in that category). But if you can create a plan – how the borrowed money will allow you to increase profits sufficiently to not only pay back the loan but also increase your wealth – then it can be a wise move for a growing business.
In this case, if the farmer had created a plan, he would have seen that the increased revenue would likely have been enough to pay back the loan.
If you don’t have a plan, then debt can easily get out of control. At the beginning of the growing season, it’s tempting to borrow money to buy everything you need to get started – seeds, soil amendments, equipment, and so on… and there’s nothing wrong with borrowing money. Just make sure you’ve laid out a plan to pay it back.
#9 – Plan for growth
Finally – don’t just plan for profitability, plan for growth. As you think about what you want to do in the future, look to the past. You’ll be able to see what has worked and what hasn’t. It will help you create a viable plan.
Planning for profits isn’t difficult… but it takes time and commitment to set up systems, and make sure that a) you track what you need to track and b) you make the time to analyze the business. While it’s okay to borrow money to grow your business, make sure you have a plan to be able to pay it back.