Farm Budgets Growing Your Farm Into A Business
March 1, 2023More Info
The 2023 MI Ag Ideas to Grow With conference held virtually, February 27-March 10, 2023, is a two-week program encompassing many aspects of the agricultural industry and offering a full array of educational sessions for farmers and homeowners interested in food production and other agricultural endeavors. Sessions were recorded and can be found online at https://www.canr.msu.edu/miagideas/
Today's topic we're going to talk about farm budgets and growing your farm into a business. For today's topic, we are going to cover a couple of different areas. We're going to start talking about what is a farm business? How do we find that? We're gonna get into some specifics about employee information or identification numbers, tax exemptions that exist out there, business structure options, and then a little bit on business planning. And once we've kind of gone through that, we're going to talk about what our farm budgets, That's part of the title of today's talks. We're going to get into a little bit more on, on what that, what that really looks like and what that means. We're also going to talk a little bit about finding cost of production and why that's important to our thought about trying to build a farm business. And we're going to talk a little bit about production versus the taxes view that we have. And provide us some examples of how to find one versus the other. We're also going to really emphasize today about how details are really a must for success. And we'll definitely showcase that in some examples before getting into some MSU resources that we have. So let's go ahead and get started. One of the common questions that we get is a business versus a hobby. And how do we really define that? What we tend to look at is starting places. The IRS definition to the IRS, a farm is a business. It cultivates, operates, and manages for profit. And the for profit aspect is actually the key in all of this because they're gonna be looking at, It's the idea that a businesses for profit, We're a hobby. Hobby farm is really just something you enjoy doing. And so you're not necessarily looking to make money at it. And so very basic definition that the IRS uses. But there's some caveats that kinda go with that. There's some presumptions that the IRS has when it comes to this idea of being for profit. Because the question is, how do we showcase that we're actually for profit. So the IRS has what they call this presumption of profit. And I'm showing here on the screen the farmers tax guide. The image here is from the 2021, but we do have the 2022 is available for this document and this outlines a lot of helpful information. But it also talks about this presumption of profit. And basically what it amounts to is if a farm produces a profit, so you've made money in three out of the last five tax years than the IRS considers your farm to be a business and not a hobby. Now, in three of the last five years, the question can be for some farm operations, especially for beginning farms, what if we don't have profit in the first three out of our five years, we think about fruit, e.g. that it may take five years before we start to see any kind of real income or any kind of profit. Because those plants, those trees are those bushes they've got, or the vines they've got to mature to a point where we can actually sell something and start making money. And the IRS actually understands that, they will look to extend that time period to where they look to see if you can produce a profit in two out of the past seven years. So they're going to give you a little bit more leeway there. But the key thing is that you've got to be carrying on activities as if you're trying to seek profit. Now, that kind of leads into its own question of how does the IRS decide your farmers seeking profit? And so a lot of cases, what it comes down to is one thing to keep in mind is that if the IRS is asking this question, that means you've been audited because they don't typically ask this question of every tax person or every file their own taxes, every farm that's out there. They're going to do this in cabinet audit situation. So they're gonna be looking for some information. The IRS is going to consider the methods of your operation. And so they're going to want to look and talk about, are you operating in a business-like manner? Are you doing things that are conducive to operating a business versus a hobby. And e.g. as you think about business losses, are they from circumstances beyond your control or are they from normal startup costs of farming where you have done everything you need to do to actually try to create a profit, but circumstances were beyond your control. Or it's just that part of the startup period where you're actually operating for profit. You're making sure that you plants have everything they need, the livestock have everything they need. It's just not happening as fast as what maybe you would like. You are actually operating a way that looks like you're trying to generate some profit. The other aspect of this is the thing about future profits are being expected. They're going to look at the assets that you have, especially on your depreciation schedule that you filed and kinda determine, is there gonna be some expected appreciation of value that it's going to be generated from farming activities. So we think about a wheat field, e.g. that we plant maybe in winter wheat we planned in the fall to harvest in the spring. And so we plant that seed in the fall. It's only worth basically what we've got into it at that point. But eventually that crop is going to grow to a point where it's going to have a lot more value when we go to harvest it. And so they know there's gonna be that growth of value, that appreciation of value, the same back to that fruit example I used where we know after some time there's gonna be some harvestable production off of those fruit trees or bushes. And so we're going to have something of value. They're gonna look at that and recognize that as being the case. The other thing that they're going to also look at is your profit motives. And so this, this kinda ties in a little bit with your methods of operation. Because are you spending the time the effort on the farm, the tiny indicates that you are intentional will be profitable. Are you are you out there every day doing things on the farm to try to make sure that you've got everything in order that again, you're tending to your crops, you're tending to your livestock. Or is it more of a hobby type thing where you go out every couple of days to kinda check things out and you make sure that livestock feed but clean and pens every day. Are you are you are you actually acting in a mode that's more business-like versus kind of a leisure hobby. And also look, they look at are you dependent on farm income for any of your livelihood? So we often talk about the case where many cases, and especially for small and beginning farms, you're off farm income is usually supplementing OR and providing for some of the costs of the farm. But as a firearm generates income, is it covering any of that daily livelihood? Was it paying some of the bills, maybe not paying all the bills, but is it actually providing income that is used for the day-to-day family living type expenses that you're going to have. Then does your method of operations change in order to improve profitability? So you figured out as you're going along, a better way of doing something, or we want to try a different method because we think it's gonna be more beneficial and generate better production and of course, better profit because of those activities. They're also going to look at the historical performance of the farm if you've got the information for that. And they're gonna wanna know has the farm had past success making profit using similar methods to what it's using now. And if not, that kind of goes back to, did you make a change based on the idea that you're going to hopefully get better profit. Again, did you have profit in some years, but they're also going to look at the amount of the profit that was earned. To say it is that kinda makes sense to being businesslike versus more of a hobby. The only thing they're going to take into consideration is that do you or even the advisors that people you work with and whether you're working with an agronomist from people with livestock has got nutritionist. Do you or your advisors have the need knowledge to carry on success business? There are a lot of people that are very good at being producers. They can raise great crops, great livestock. But they don't understand the business side of things very well. And for people that are starting out, that's sometimes is the challenge area. But if you've got good advisers, you're working with good support networks of individuals you're working with within your, essentially your management team on your farm. They're going to look at that, the IRS when they're walking through this and say, Do they have combined the information, the background to be able to make sure this is going to go forward successfully. So that's the IRS kinda viewpoint on things. This kind of question of, does the farm need to become a business? No. There's nothing wrong with having a hobby and keeping things that what's considered that hobby level. And so the choice really rests with the farm owners. You don't have to go into being a business if you don't want to. But some things that you can kind of think about are, does tracking expenses for the for-profit activities take away from the farm enjoyment? You got into this because you enjoy it. Most people get into farming because they enjoy it. And so does kinda starting to do some of those business type things like tracking expenses, start to take away from that enjoyment. Or is in this case, I'm going to talk about vegetables, is racing vegetables more for recreation or four added family income. And you start to think about, do you wanna do it just for the fact that you enjoy it? Or do you need it to be maybe a part of your income that you need, the supplemental funds. Now, if you decide you want to stay in that hobby area, according to the way the IRS describes it, the only thing you've got to remember is you still have to report any income to the IRS you generate, even if you're just selling to your neighbors because it's still taxable income and you're gonna need to track that and still turn that in. Now the fact that you still got to turn the income and that's where there's maybe some benefits to thinking through the farm business side of things. And the first thing is this idea of tax deductions. Any capital assets you purchase can be depreciated and treated as an expense. You also can use your farm expenses to offset the farm income. So as a hobby farm, you can only report the income they're going to tax you on the full income you've got. Whereas a farm business can offset that income with expenses. And then also use capital asset purchases as additional expense either in the single year over a course of several years to help reduce that taxable income. The other thing that businesses have, as well as this idea of sales tax exemption. And so this is where the farm business, you don't have to pay sales tax on inputs. So like fertilizer chemicals, maybe some feed if you've got some livestock. This does not apply to capital purchases. So if you're buying a tractor or a pickup truck for the farm, you're still going to probably pay the sales tax on that. I have seen cases where depending on how it's worked out, it's kinda covered in the cost. But typically this does not apply to capital purchases. It does require completing a Michigan sales and use tax certificate of exemption. Really long title they're formed 33, 72. But if you go into a lot of the farm retailers that you'd be working with. A lot of cases they have that form there for you to fill out. Not a very complicated form. There's just a couple of things to fill out on it. Really trying to indicate that you're using things for tax or for agricultural purposes. And they will keep that on file there at their place of business. And that's kinda the main thing that the documents used for is it gives them a record of why they're not charging you sales tax. And so that's a nice added benefit of being in the farm business versus in maybe more of a hobby setting. The other question that we typically get is around this employee identification number or the EIN. What is it? And do you need one? That is a common question that we get from folks. And it really depends on the business structure you're using for the farm. Corporations and partnerships are required to have an EIN just so there's something to identify them by. If you're looking to be in a limited liability company or an LLC, you're only required to have an EIN if you've got two or more members or if you're a single member and you're hiring employees. So if you're a single member LLC and it's just you you don't have to have an EIN sole proprietors. It's not needed. But you can get one if you want. There's nothing saying you can't have one. Especially if you think down the line, you might want to possibly form an LLC or look at some of these other business structures. There are cases where you can use that, go through that process and be familiar with what that goes through to get an EIN. Most small and beginning farmers though, tend to be sole proprietors. It's just you, it's starting out as a small business unless it really warrants needing to be in some of the other business structures. Most people kinda stay in a sole proprietorship. There are cases where you want to be in an LLC or eventually you look at a partnership or, or even a corporation. But starting out, you don't have to go ahead and jump right into having an EIN. It's not a required thing for that and I'll kinda highlight that on the next slide a little bit. Why that may be is, but one question I get is working, we get an EIN and you can get them from the IRS directly. You can apply actually online through their website. The form is SF4. You can submit that to the IRS or you can even have your tax accountant assist you with filling that out. Now in terms of business structures are some things to think about in terms of what makes sense for our farm. I want to highlight here and I want to give credit to a colleague of mine for actually developing this slide. Really, I think helpfully outlines what actually you want to think through and kinda thinking about what's business structure for a sole proprietorship or a partnership and unlimited liability company. These are easy to get into and they're easy to get out of. Sole proprietorship. Typically you're one-person. You are the business partnership, very similar to a sole proprietorship, but you can have more than one person. So that's kind of a nice thing of there's two of you that are, maybe three of you that want to work together. You can operate under a partnership and still be very similar to a sole proprietor. Limited liability companies are LLCs. They offer liability protection with similar to a corporation but without the startup complexity. The one thing to remember is this, liability protection does not replace which you'd have for Farm insurance. You're still going to want to have some farm and assurance is some liability coverage. If you're, if you're thinking that liability is a concern. And you're going to want to do some research and have some talk with an insurance agent about what makes sense for coverage with being if you're looking at an LLC and whether or not the liability coverage you think you need is really warranted because there's different levels of insurance. And the limited liability corporate or accompany the LLC structure provides some protection but doesn't cover against everything. So these are really easy to form. But you notice that with an LLC, there are no potential tax savings listed here. The reason for that is because an LLC is what's considered a pass-through entity for taxes. So whatever the farm generates for income or expenses is going to go through to the members. So if you have a 5050 LLC where there's two members in each person got 50% ownership of this company than 50% of the income and expense goes to person one, and the other 50% goes to person two, and it shows up on your individual taxes. So there's really no tax savings for an LLC. That's a common misconception that people have about business structures. For an S Corp and a C Corp, there are some tax savings. You do have the ability to with an S Corp to kind of split out your wages and half pass-through income to the individual, to the actual members. And so as you're collecting a wage from the business and then you're also collecting farming income. That kinda helps in terms of maybe some tax strategizing. A C corporation in most cases, what did you think about a corporation in general? They file their own taxes, their separate from your individual tax, especially in a C corporation. And so this can allow for some differences in tax savings. The biggest thing that I want to highlight for folks as you look at these, you're going to need to make sure you have very balanced books because you've gotta be able to track where this money is coming into and going out of. And especially if you're looking at a corporation that has its own tax filing that you're making sure you're tracking everything really well there versus maybe your own individual taxes. There are also some government payment limitations if you're looking to participate in any programs that are offered through USDA, whether they're Farm Service Agency or other programs, there are payment limitations based on the type of structure you have, and how many members you have and what they're connected to and other types of businesses. So there's some things to be considered there that's especially important as we continue to look at things. Especially We're in a foreign bill year where we're talking about the next iteration of the Farm Bill. Because a lot of talk about programs for specialty crops that we want to look at. And hopefully they're going to have. And so we're going to be really important to know what your limitations are gonna be if you're looking at those type of programs. So one thing that comes to mind is also if you're looking to move into a business, when should the business transition really start to happen? And that's going to depend on a few factors. Has the income reached a level that there are significant tax implications that might be a good time to start looking at making that transition or have the expenses reached a level of the hobby is no longer affordable. I have some friends of mine that have an apple orchard and they've gotten into they've got beekeeping that they're doing now. They've been making cider and there's been some talk about some wine. And when we were talking about the businesses that got into and all these different ventures they started. They categorize it as well. These are all hobbies that got out of hand. And basically the expensive reached a level that they had to start doing some of these for profit type ventures to try to make it plausible to continue doing a lot of what they were doing. They really started out just wanted to do the apple orchard. Then they've kinda gotten into some other areas along the way. And that's very much the case for, for people. And there's also the idea that it's a personal choice and desire that you'd like to pursue business. There are cases where people see an opportunity that they say, yeah, I want to get into that and develop that into a business. Or the eventual goal is to get to a point where you can make that transition. And so you decide you're at that point and want to go ahead and do that. We talk about when should it happen? Now let's talk about how should it happen if you're looking to start really operating on this business and keep keeping things separate. Start with. Having a separate checking account for the new business. You can have a savings account as well. It's not always needed. But you can do that. Then you need to decide which business structure works best for you. And if you need to obtain an EIN number and file the paperwork that's needed for that. The other way that I want to highlight is we think about getting started, is we want to talk a little bit about this idea of really having a business plan. The business plan is really your blueprint of how your business starts, but it's also the guidebook of how the business and tends to grow. And I want to highlight a couple of things here. We won't spend a whole lot of time on business planning. We actually just had a whole big Beginning Farmer series that completed last week on business planning. And so I definitely want to recommend people check that out through MSU Extension. When we think about business planning, when we get started, we often start to think about the mission, the vision. We have, our core values and ultimately our farm goals. And I like to kind of whittle these back to some simple questions for people as they're starting out to just start thinking through. What are your passions about raising? In this case, we're talking about produce. But in being in farming in general, on raising any kind of production. What are the passions that you have for that? Do those passions translate into a business? Because sometimes they do and sometimes they don't. So it's really important to think about what are the things that you're really passionate about doing and does that work into the business kinda setting? And then if they do, what goals do you want to achieve? So really some important questions just as you're starting out and thinking about making that transition. Now when it comes to the business planning, I like to tell people to start with the marketing plan. And the reason that I highlight the marketing is really from a basic level of foreign businesses must have products that consumers are willing to buy. If you don't have a customer, you don't have anything that's going to get sold and you're not going to have any profits. So you gotta have a customer that's going to be willing to buy the products or the production that you're raising. And so we have to think about the markets that we're entering and our market strategies. What is it we're marketing? You know that fresh produce CAN products. Are we doing things like edit, agritourism or some value-added products that way. Or are different types of evaluated experiences maybe we're adding onto the farm. Are we marketing those products? Where are we marketing them? Who's our competition in our market? Now these are all important questions we want to think about, about what we're getting into and have an understanding of what it is we're getting into beyond just the fact that we're producing something. It's an important question we think about. We want to go into business or kinda stay into a hobby. Because if we enjoy doing something recreationally and we have to start thinking about these things and we're not sure that we really have a market that may be something to think about in terms of whether it's the right venture to be pursuing into a business. If we think it is, we can start to think about marketing from what I call the four Ps of marketing. The product, the price, the place, and the promotion. With products. What we can think about is this idea of what are we selling? What makes it different? Or what are some features it has that separates it and makes it maybe unique in the marketplace. Can we use some pricing strategies that really highlights our product, that really highlight the uniqueness or some of the features. Are we raising it in such a quantity that maybe we can offer some discounts and comparison to what's already being offered in the market. As we think about the place where are we marketing this at? Are we, are we doing this at local markets? Are we doing direct-to-consumer? What are some of the different ways that we're going to actually mark it and place this product for people to actually be able to purchase it. And then as we think about promotion, what are some of the ways we're going to go about promoting this as it all online. Are we going to be doing some, what I call nowadays kinda more old-fashioned of flyers up. Are we sending out newsletters to businesses? Are two different people. A lot of different avenues that you can think about how you actually advertise and promote that you have a product for sale. The other thing that I always encourage people to think about is a swat analysis. And lot of people are familiar with swot analysis. I'm sure most people here on the session today have heard of this before. But we're really trying to identify the internal and external factors that. Gonna be helpful or harmful to achieving our farm goals. But I want to emphasize that we think of more of an active swot analysis. That may be what? The traditional swot analysis that we have here sitting on the screen. When we talk about strengths, what do we do best? Weaknesses? What are the areas we can improve or do better? What opportunities are available to us? And then what are the threats that exist out there in our marketplaces that we need to be concerned about. We talk about those in a basic sense of what are these things. But what we really wanna do is go from what is to ask you more of a, what do we do about it? We think about the strengths we have in the operation. How can we leverage the strengths or weaknesses? How do we mitigate our weaknesses? Were thinking actively about how we're gonna do something, what we need to do about something. What are the steps we're going to take to actually facilitate this? If there's opportunities, how do we actually exploit or take advantage of those opportunities that are available? And then if we do have threats, how are we going to dissolve or mitigate those threats so that they're not a huge impact to the success of our business. So this is just kind of a different mindset that I like to promote to people to think about as you're thinking about getting into this business mindset of looking for this for profit motivation. What are we, what are we trying to achieve and how are we going to actually go about doing it? So as we kinda come back to this idea of a business plan, some of the other sections that we often talk about are the business description. Who are you? What do you do? Where are you located? Who are the farm owners involved? Then what business structure is your farm? These are kinda basic questions or descriptive questions of what is just the basic information about the business. We also want to think about things from the management and operational side. Who's involved in the business? How are the tasks that have to be handled being divided up? How do we actually have that all organized? How are the employees being managed? They may be part of handling some of those tasks that we know have gotta be divided out. How are they being managed? How are they involved in the business itself? And then are there any professional services that are part of the management team? Are we working with an agronomist and nutritionist, a marketing type person, the lender, those types of folks that are involved in helping us think through the actual movement forward of the operation. And probably the one section is the easiest for people to think about is the operations side. And this is one that we're really comfortable with writing out a business plan. This is probably easiest one to start writing with. Is, what do you produce? What are the methods or the production practices you're going to use to actually produce those products on the farm. How are you going to manage those methods? And then are there any risks that you're exposed to within the way that you're actually producing your products. And can you manage those are, how are you managing those? Lastly, I like to tell people a business plan needs to finish with the financial planning side of things. Does the business plan make financial sense is really a basic question you're trying to answer in a business plan. Our financial statements can help answer that question. For our balance sheet, what do you own? What do you owe? The difference between those is really the value of your business. How much it's actually worth. An income statement. We looked at, did the business make or lose money in the last year? So where are we profitable when we look at how the farm did? So again, back to this definition of, you know, do we have three out of five or two out of seven years prophets, the income statement kinda helps us to verify that. A cashflow statements really helpful to understand where the cash came from and where the cash went. Because we can track on the other two statements, the inflow of money. In the outflow of money. But the cashflow statement kinda takes all the information from those two statements and reformulate it in a little bit easier way to kinda follow that movement in the movement out of money. So we kinda know where do we start from and how did we get to where we ended up? And it kind of helps tell the rest of the story in terms of financial position on the farm. And for Pharma starting out, many may not have a lot to put on these statements. So for those of you in attendance today, you may be thinking, well, I don't have a whole lot of stuff to put on these statements. That's fine. Your businesses just starting out. You're not going to have a lot. Your business is growing, it's going to continue to grow. And as your business grows, these financial statements help to capture that growth. And so that's really important is you're showcasing the profit motivations and the methods of operation and these for-profit activities. You've now got some documents that you've created that really showcase. From a financial perspective, that kind of activity. One thing I do want to highlight and I see some familiar faces or a names here on our checklist. Or I know a couple of people were in our business planning program. Little bit familiar with this software here, this website, but eggplant is really great farm business planning app that's available through the Center for Foreign Financial Management. I will put the link for this actually in the chat when we get to the end here. But it's really great place to actually start developing your business plan and start, start thinking through some of these aspects of developing the overall business and some of these methods of operations as the marketing, the for-profit type of motivations. The added nice thing is that there is a, an opportunity to ask for reviewers. In fact, i've, I've got a business plan. I'm gonna be sitting down to review yet this week for an individual that's through ag land. And so you can ask people either part of a center for foreign financial management or even folks here at MSU Extension to, to actually look at the business plan and give you suggestions on how to add content or things to think about including, It's a really great app that I encourage people to at least check out. And it's in, it's free to use. So that's the other benefit to it as well. So we're about halfway, we're a little bit more than halfway through our program. And the question now comes up, where do farm budgets fit into all of this? And that comes back to the question of what our farm budgets. And really what I want to highlight for people is that a farm budget is really the goal for the year. It's kinda highlight your production and your financial achievements. And it's also going to be a reflection of the farms capabilities and concerns we talk about that swot analysis. Those kind of things come out at a farm budget. You can start to pick out some of that information. Looking at a financial foreign budget. Now, you do that by making sure that it's reasonable and accurate and its expectation. So if you've got any kind of historical cost of production, you want to use that to kinda help look at what your present day budget is going to look like. And I'm going to show you in a couple of examples of how you do that. But very importantly, your foreign budget is also outlining the path to success. So how can we, or what can we do to achieve our goals and get us to where we want to be. Really that foreign bunch. It's helping to tell that tail. So why is cost of production such a big deal? Especially think about financial planning. Firm budgets. Managers improve the decision-making by understanding that past performance. As you think about past performance, your cost of production is actually a representation of that performance. It's a financial representation. But it's one way to look back and see how did we do. And you can kind of track that over time to say how are we doing going forward? What are some trends we can look at? How much was produced. What was the production sold for? What did it cost to produce our farm products? And importantly, did we make any money? So as you compare your current budget, it helps to guide, improve your decisions going forward. Now, we ask the question of why is it a big deal? Well, how do we go about actually finding it? And that's a question. We get a lot of, you know, I need to find my cost of production. I think to answer that question, we've got to really understand what cost of production is, not what it actually is. Cost of production is not only the inputs that it takes to raise the crop, it's not just the fertilizer, the chemicals, It's not the feed for your livestock. By itself. These variable expenses that are going to change year to year because you're going to make me any more or less depending on what you're raising and what you're doing. Cost of production is actually all costs operating. So we've got our variable costs. We've also got some of these fixed costs. If we've got any Farm Insurance, land rent that we're paying for any of our labor that we've got and labor, unless we've got a lot of variability in labor, labor tends to be pretty steady most of yours, but for some farms that does a little bit more of a variable cost. But there's also depreciation, which is the wear and tear on our assets. So this is not the same as taxable depreciation. This is more about the loss of value of equipment as it gets older. So as we put a year's worth of use on a piece of equipment, it's not gonna be as worth as much the next year. Well, there's a cost to that in terms of the value of our business. We want to try to capture that as part of our cost of production. Because to maintain profitability, to maintain the value of the business, we asked the farm to generate enough profit to cover that loss of value on that, on those assets. And I can spend a whole lot of time to talk about depreciation because it kinda trips people up a little bit. But just to know That's another expense side of things that we look at with cost of production. Cost production is also not based just on your IRS tax return. And the reason for that is that a tax return can actually have income and expense for multiple years. You can have receivables and inventory sales from the year before that they'll get sold until the next year. You can have actual production, sales and costs from the current year. And then you can have some prepaid expenses that are actually intended to be used next year. Instead, your cost of production is based more on a production year where you're looking at only the things have happened or were part of the actual year you're talking about. So from a production sales, and costs, we've got thinking about just from a year prepaid expenses that maybe they were bought last year, but we're used in this year. And then any receivables or inventories that we know we're going to have to receive them next year, but they regenerate it out of this year. All get part of that production year viewpoint. So how do we get to that point? How do we go from taxes to the production year itself? I've got an example here when a highlight where we think about just some expenses where we use our income statements and balance sheets to kinda help us answer that question. Our tax return covers a lot of the same information we're talking about in an income statements are cash transactions for the year. And so we start with that. And so I've got a couple of examples here of seed and nitrogen costs for fertilizer. And what we wanna do is if we prepaid for any expenses the year before, then we want to be able to add two add those to this year because they were used in this 2023 here. I'm going into the future a little bit here on the next part where we're planning to have some prepaid expenses we're going to by the end of this year to use next year. So we want to subtract those out because they're not really part of the 2023 year. When we do this math, we come to the actual expense for our production year of 2023. And we can see comparing the light green to dark green on our seed. We go $1050-950. So that means we've actually reduced our actual costs was a lot less because it was kinda mass by some of the prepaids because he's prepaids are part of this thousand and 50 we've got here. And we can see in terms of nitrogen, we were actually about $50 more in total expense because we spent a lot more than a year before using this year and not as much this 250 we spent as part of this for 25. We didn't spend as much that we're going to carry over next year. And so we can tell this difference is the actual amount is gonna be a little different than what's on our tax return. It's a five acre example. So we have a cost per acre here of under $90 an acre for seed and $95 an acre on nitrogen. So we compare this to what we actually have planned. And so what we originally put in our budget, we had mapped out originally pounds per acre, price per pound on both seed and nitrogen. And our cost originally for seed was going to be around $180. We can tell that, well, our actual with a little bit higher. So we have to ask the question, why was the actual hire? Was it because we didn't buy the seed. We were thinking out did we did we haven't accidentally spilled some bags would be to go out and buy more bags. Did we do we change something or have a production practice change that influence that? The nitrogen was pretty close. We said 96, we're thinking of it ended up being around 95. Was there some reason for that or was it just, you know, we're, we're counting pennies here versus, versus not. But the important thing is you can look at your actual and starts to begin to ask the question of what led to the difference between what we planned and what we had for actual, where there's some decisions we made along the way. Do we want to repeat those decisions? Do we want to make sure we don't repeat those decisions? And we start to think about making some decisions and doing some, some forward thinking in terms of how we're going to handle things for the next year, for future years. Based on the fact that we've looked backwards to figure out what did we do to get to where we ended up for the year and what was those actual numbers? You can do the same thing with income. The for this case, we're gonna go a little bit backwards where we start out looking at again, we've got our income statement. We had 14,500 to sales. We had some receivables that were part of this 14,500 that were really last year's sales that we didn't capture them though until this year. So we want to subtract those out of this total. But then we're also going to have at the end of this year, we're going to, we're projecting that we're thinking about or if we are looking at your behind, we know that. We had about 2,500 that is going to get captured in 2024, but was really part of the 2023 years. So we do this math again. And now we come to figure out that our actual income was $15,000 for the year, $500 higher than what we reported on the taxes. Because our taxes is different than our production view. And then we can look at the gross income per acre. We can look at the production. We had. How many crates? In this case, it's crate, so sweetcorn that we're looking at. How many crates per acre did we have? We can figure out what our cost for our price per crate was to then compare back to our budgets. So as we think about originally figuring out price per crate, number of crates, and projected gross income. We can see first that the price per crate was a little bit higher actually than what we had in plan. Was there a reason for that? Did we do a better job of marketing as we want to kind of think about, is there something we can repeat to do that? We can also see there's a difference in the production. We expected a lot more crates per acre than what we had. Was there a disaster reason the costs that do we need to look at insurance program to help us mitigate that kind of thing. Was it a production decision and actual practice decision we changed. That didn't benefit us the way we thought it was going to. Because then we can look and see that we are actual income was a little bit lower per acre than what we were planning on. So we kinda start to think about again, these production practices, these decisions that went into what we did and how can we change and improve going forward. To get to this level of detail, your farm records must have details in them. You can't have expenses that just say seed. You've got to say where did the seat goto, what was the actual crop, but it went to the same thing with feed for livestock. Animal. Did it go to was it on a dairy farm? Was it for the dairy cows or was it for the heifers? Fertilizer can't just be fertilizer. What crop indigo to your kind of basing this on the enterprises of different crops you're raising. Same with sale. That can't just be sales. You've got to get some information on what were the units, what were the prices received. And so gives you some information to really think through some of this stuff. In details are really a must for success. And we think about this from the side of farms track production details. Why do they do that? Well, we want to understand the farms abilities. We want on our production history is we want to know its potential. We want to recognize the areas concern you. What are those limitations to that potential that we've got to work around on the production side of things, then we wanna be able to address those concerns and improve the overall farm performance. Well, as you think about farm records, those same reasons apply. We want to understand what the farm has achieved. We want to look at that from profitability, cashflow, overall business growth. Those details allow us to have a true comparison to the industry or the industry numbers out there. So we can really compare to other farms and thinking about areas to identify some concerns with those numbers. Even just looking back at the past, we can kinda see we did a better job of this in the past. What changed? Well, this was a better number in the pastor. Maybe we're doing better now. What what did we, what are we doing that we want to keep doing forward? Records, of course, are the foundation to this year's plan. If we don't have detailed records, we don't have a guide and those records provide a really good guide for us to use. So I wanted to highlight that as something important to consider here as you're thinking about trying to go into this business mindset and operating, start to track those details gives you a lot of good information to show those profit motives, those methods of operations that the IRS likes to use for their definition. But it's going to put you in the right steps to go forward and be successful. I also want to highlight that we've got some resources around these topics through our beginning farmer demand series. We actually have a bulletin on farm management experience as a resource guide. Lot of great information in there for people starting out things to consider. Lot of resources that are not only from MSU but from other universities. And we also have a bulletin on an introduction to cost of production that uses kinda cover some of the things we've talked about today. But gives you a little bit more in-depth look at thinking through variable and fixed expenses in some of the uses for that on the farm. And I want to put a link up to our series here in the chat in just a moment. Some other resource. So also want to highlight, again ag plan. We've also got our demand series, but then also farm answers is a resource for beginning farmers. It's a resource for all farmers, but especially the beginning farmers farm answer that organ. I'll make sure we get that link in the chat as well. It's actually our friends at the Center for Foreign Financial Management are involved with that as well as USDA and a couple other universities. And so really great place to look up information that I want to highlight for folks. And we'll get those in the chat here. Then the last thing I want to highlight for everybody is also the complete the evaluation. And I think this is going to change. I mean, again, yeah, it did. So I'm going to actually stop sharing the screen. And we will actually share back over. You use the QR code. There. There you go, good QR code working. And then I also want to share these links in the chat. At this point, if anyone has any questions, feel free to either put them in the chat or if you'd like, feel free to unmute. And we'll see what's actually here in the the webinar will be available. We're going to post the recording actually on the Michigan AG ideas to grow website. And then we're also going to make sure it's available through the MSU farm management website as well. And later date here after the conference. And I'll also make available the slides to go with this. In fact, if you'd like a copy of the slides, I'm going to put my e-mail address here into the chat. Feel free to email me. I can send you a copy of the slides, but we'll also make sure those are available as a download as well to folks that want to watch the recording and have those as well. So one other question we've gotten the chat is there, There's an individual's got an interest in turning a hobby farm into business as a way to pay for the children and begin saving and investing for them. And so one of the things when you think about building into a farm for investment, you're talking about very capital heavy type businesses. So as you invest into the operation, one of the things that you can do is you can think about in terms of the long-term plan and the operation where if you're thinking about one option, of course, that you build the operational point where you're going to eventually sell it to someone else. Or and so the sale of those assets can be used towards investment for things like college and and, and other type investments you want to help the children with. The other thing to think about as you're generating income and profit for the farm. Which you can think about is as you're developing your budget. If you're wanting to be able to take some of the proceeds to melt profit, revenue you're generating and kinda set it aside for towards and maybe into a fun, you can actually do that. It's the same as taking a draw from the operation that you can actually pull money from the operation to set aside you want to be thinking about is that you've got that in your planning to think about how much can we set aside each year? Because you're going to have some years there's going to be really good, really profitable. Other years are going to be a little tighter. How do you set that up to where the farmers making, maybe putting some money and investing, kinda like setting money aside to maybe invest in a capital asset purchase, like maybe a new tractor or a pick-up or something like that. You can actually do those types of things where you can set up and have some money set aside that maybe we're on a separate savings account for the business. Maybe a good thing to have. But those options, those are just a couple of things to think about. I have a question I was wondering if you could give me some input on. So I'm actually an MSU egg industry student now. And I've gotten several different answers from different professors, different textbooks. Everyone kind of has their opinion on this. But let's say you're a guy like me, Beginning Farmer, you've got the 40 Acres to work with. And like in my case, I just rotate between corn and soybeans. And of course, in the row crop market at that small acreage, you're not necessarily going to make a whole lot of money at it. Are you better off, more looking to diversify? You produce, you're better off trying to find more land and grow your row crop operation. Stick to getting really good at that? Or do you think there's something else that could be considered? Well, the the part of the reason you're probably getting a lot of different opinions as there's a lot of different routes you can go there. There's no necessarily right or wrong in terms of what the best method is. Because a lot of cases it depends on what the opportunities are there for you in the area. So in a case where you're talking right now being with corn, soybeans and with 40 acres. One avenue that I've seen be successful for people is to think about looking at reducing some of the operating costs from the standpoint of you've got row, row crops are a good example of where to do things independently. You've got a lot of capital assets you'd have to purchase on your own. And I can tie up a lot of your funds in a hurry. So one thing that typically I've seen work really well as where people will partner with their neighbors. They'll do some sharing of equipment to try to cut down on some of those expenses, maybe do some hiring, some custom work. The thing is the thing about your cost of production and where you need to be to kinda maintain profitability and how you're going to reach that point because you can use custom applications may working with a local retailer or working with some neighboring farms would be one avenue. Sharing equipment is one thing I've seen where people have gone in and bought equipment together and share because they kind of share the burden of that overall cost. There's a number of different avenues you can look at in terms of switching out to diversifying and looking at other crops. It kind of goes back to the idea of what's in the area, What's marketable? And is there a market that is really interested for row crops? There's an option is their vegetables potentially that you can look at to possibly raise those, not having to buy a whole lot of new equipment necessarily maybe utilizing some equipment you've already got, or utilizing maybe some assistance. Again, looking at neighbors, it's all about what the opportunities are there for the area in terms of maximizing row crops. The other side of it is, I encourage, especially beginning farmers that are in smaller operations in general get really good at understanding the marketing of the grain. Because there's a lot of useful tools and contracts that are out there that people can look at versus even on 40 acres worth of ground that you can look at to try to lock in to maximize your profit too. So you've got a lot of options to look at. And I think that's true of a lot of farms of similar size and scope that you really look at what your options are and how to maximize those that are available to you. Okay. I appreciate it. Can I jump in on that? Sure. I'm still I'm an agronomist with the fertilizer company and I, of course, fertilizer is often discussion in this scenario, but maximizing profitability, yes, really is the goal. And I have had the conversations recently with several growers of various scales that increasing your efficiency. So it really depends, are we in a below critical level on nutrients? Are we in a luxury maintenance level? And if we're on the lower end, using things like banding or strip till systems can make a very impactful advantage, especially at current input prices. So it's input prices chase commodity prices. But if we can increase the efficiency of the use of them, were that much farther ahead? Yeah. I would agree with that. And that's something for all farms to think about is you're trying to think about those efficiencies. And thinking about as you're looking at your cost of production and year-to-year, you've got to think about what's the most efficient way to operate. There are e.g. there are some smaller size dairy farms that have figured out what they're very efficient at. Certain aspects of whether it's raising crops, whether it's managing the herd. And then they have looked at the opportunities too. For lack of a better word, maybe outsource either to retailers or to other farm operations. Some of the other aspects of the business where they work with them to be more efficient and cut down some of those costs. When you're talking about inputs specifically, this is where you really want to spend the time to think about understanding what it is you need to raise a crop, to raise your livestock. You've got to really increase your knowledge of what's needed and really continue to push the education. Because the more you understand and the better you understand about production practices and how it's going to impact not only the production, but the potential profit. You're going to build these efficiencies in there. So the example of fertilizer in a given year, how do you kinda make adjustments for fertilizers considering where the costs are and being able to factor that into your planning. How do we still maintain productivity? By understanding what we have available and what we're going to have to pay for in terms of fun, the nutrients, There's actually a lot of resources we've put out at MSU Extension around nutrient management that focus around trying to figure out in that specific input, how to figure out to maintain productivity efficiently and profitably. And the same is going to be true for vegetables, for fruit, and for livestock. It's really about understanding where are the efficiencies can be applied and really looking at those production practices and how they're going to impact the actual cost and profit potential of the business.