Introduction
In a previous blog post, I discussed some ways in which you could properly manage your finances but in this episode, I would like us to discuss how to evaluate your farm’s financial performance so that if something is going wrong, you could easily correct it.
Why you need to understand your financials
Try this simple experiment. Go around your area and ask 10 poultry farmers about the exact amount of profit they made the previous month – don’t be surprised if only of them gives you any reliable figure. Sure, you could always hire a bookkeeper or accountant to help you with this but imagine you want to seek funding from investors and you cannot even answer simple questions on the profitability of your farm, who do you expect to take you seriously?
The three most important financial statements
Now that we all agree it is important to understand our financials, let’s go into the three most important financial statements: the income statement, statement of cash flow and the balance sheet.
Each of these financial statements gives an entirely different picture of your farm’s financial situation. For instance, your income statement may show that you have sold 200 broilers to a local restaurant. So, at the end of the period, you may record a profit but your cash flow statement might tell you that you haven’t yet received the money for the number of birds you sold. And we all know that cash is king in business, therefore, all these financial statements must be integrated to tell you the full story of how your business is performing.
Income statement in greater detail
The income statement is a record of how your business performed in a given period usually during a month, a quarter or a year. In the income statement, you have records of total revenues and total expenses. As a poultry farmer, sources of revenue include the sale of eggs or broilers. On the other hand, expenses include wages, veterinary visits and fuel costs.
The difference between your total revenues and total expenses is what is termed net income. If during the period, your revenues exceed your expenses, you have made a net profit but if the opposite is true, you have made a net loss.
Statement of cash flow in greater detail
The cash flow statement is very important because it gives you a clear description of how much money is entering and leaving your business. For instance, if you want rear layers and make proper cash flow projections, you will realize that it takes layers at least 4 months before they lay any eggs – this means you must understand that cash will be flowing out of your business without any return for approximately four months. Having this knowledge will help you understand the amount of money you need to raise to run your business.
Balance sheet in greater detail
I can bet my life that some of you were wondering why I forgot to mention feed as an example of an expense. Well, you are neither right nor wrong, let me explain; Due to the high cost of transportation, poultry farmers usually purchase their feed in bulk, therefore, you shouldn’t assume that feed is something which will be consumed immediately.
Here, the feed is considered an asset because it will be consumed gradually by the birds to produce eggs or meat until the feed is depleted. So after a period, usually after one month, the accounts are adjusted and the feed which was consumed accounted for. The amount of feed consumed in the period is what is known as a feed expense.
Furthermore, you should understand that all assets of your business are either derived from a liabilities or equity which is why in the “accounting equation,” assets always equal the sum of owners’ equity and liability. For example, cash is an asset. How do businesses obtain cash to run their operations? They either invest their own money, obtain cash from customers, or go for a bank loan.
Equity refers to the share of assets belonging to the owners while liability refers to the share of assets belonging to creditors, customers, etc. So if your cash flow statement indicates that you have GH₵20,000.00, that money doesn’t necessarily belong to you alone as you may be owing your bank or you may have collected money from customers for goods and services you haven’t yet supplied.
Below are the Feb 2020 financial statements of our fictional company, PKOM Farm:
From the table above, total revenues for February was GH₵ 1,769.00. Furthermore, operating expenses for February totalled GH₵ 1,887.60 representing 107% of the total revenue. The highest operating expense for the period was feed expense which was GH₵ 1,599.60 representing 90% of the total revenue. From the income statement, it can be concluded that the business recorded a net loss of GH₵ 118.60 representing -7% of the total revenue.
From the table above, it can be deduced that PKOM Farm was cash-flow negative for February 2020. At the beginning of the period, cash available was GH₵ 980.00. Since then, cash flowing into the business for the period was GH₵ 2,877.00 while cash flowing out was GH₵ 3,401.00. At the end of the month, cash left was GH₵ 456.00.
Balance Sheet
From the balance sheet above, the ratio of liabilities to owner’s equity for the period was 0.02 which shows that the business is in a very healthy financial position and can easily pay its debts. Liabilities of the business comprise loan payable: GH₵ 80.00 and unearned sales revenue (advance purchases by customers): GH₵ 1,028.00. During the period under review, Papa K. Owusu-Mensah, owner of the business, took out GH₵1,600.00 cash for personal use leaving him with an ending equity of GH₵ 56,464.00.
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Pkom 