[Market-farming] Re: Market-farming Business-Gross Profits

jasperm1 jasperm at iquest.net
Fri Feb 4 13:10:42 EST 2005


Adriana wrote:

>Let me dust off my financial books:
>
>GROSS MARGIN =       Net Sales - Cost of Goods Sold
>                                   
>------------------------------------------------
>                                                      Net Sales
>
>In theory, your Cost of Goods Sold should include not just direct expenses 
>like paid labor, seeds, fertilizer, pest management, packaging, supplies, 
>insurance, transportation but also depreciation on equipment and unpaid 
>labor.  It's tempting in a sole proprietorship mode to "fudge" these numbers 
>and overlook expenses like the car insurance that you would be paying 
>anyhow, the office space in your home, that cell phone that you would have 
>anyway, the "home" computer and last but not least, the value of your time.
>
>Unless we all use the same definitions, any discussion would be meaningless. 
>Also, different products can have drastically different gross margins and no 
>two market farmers have exactly the same product mix.  Even fewer probably 
>have an accounting system detailed enough to supply cost accounting 
>information at that level.

As an aspiring (make that wishful thinking) market gardener and someone 
who pays the bills being a part time controller for small companies I 
would like to also pursue this topic and would like to know where it goes 
if it gets moved off list.

I am struggling to figure out how to/ where to start in market gardening 
and also trying to make financial information relevant to my small 
business owners.  In most cases people feel that the "books" are to 
generate a tax return.  That is one "report" they need to be able to 
generate but if you do it right you can sometimes learn something about 
your business that wasn't apparent in the day to day getting it done.  

In your cost of goods definition I would add things like 
shrinkage/spoilage rather than lumping the costs because what you really 
need your numbers to do is help you make better decisions.  I will give 
one lame attempt at describing what I am talking about and then go back 
to lurking where I belong.

You have Producers A and B monocropping product zz variety xx in 
identical fields with the same left handed tools etc.  A calculates his 
cost of goods sold on what I will call the sold method vs. B who uses 
what I will call the produced method.  They both plant 1/2 acre and they 
both have identical crops.  They both sell their crops for $10,000 with 
cost of goods including all that stuff you should of $9,000 and a gross 
profit of $1,000.  Producer A makes the decision not to grow zz/xx while 
B decides to by an EZ up.  Why?  B realizes that he/she lost about 50% of 
the crop to spoilage because it burned up in the sun waiting to be bought 
and his/her actual produced cost is 1/2 of what he/she had to cost 
against the revenues.  Assuming that he/she could have sold all the 
spoilage if it had been good product and assuming this fly by the seat of 
my pants example does not have fatal math errors our grower B is planning 
to Gross $20,000 next time with an expectation of increasing his cost of 
goods by the depreciation on the EZ up (say $100) so next year he/she 
expects a gross profit of $10,900 on essentially the same effort.  Plus 
producer B has "learned" to anticipate the need to manage for spoilage in 
evaluating new products to sell. 

I know you can poke holes the size of Wyoming in the example but the 
point is maybe a discussion of how financials can be use and arrived at 
and taking them a piece at a time and discussing them would be useful.  
Also,  While I do agree that it is "fudging" to overlook the cost of the 
office and already paid for tractor in doing your books.  Break even 
analysis separates out fixed and variable costs and is a better tool for 
evaluating new products than a straight but completely accurate proforma 
cost accounting.  Once you have fixed costs if you can bring incremental 
margin to the table even if it does not reach some "overall" margin goal 
it may still be a good interim decision.  Also learning to make something 
from a by product like saw dust is another place where you have to look 
at what is incremental and sort of "fudge".  Until you have to ad another 
tractor or something that is fixed.  Then I feel it is advisable to first 
look to see if you can't drop something that is only marginably 
beneficial and replace it with your new better idea and not buy the 
tractor.  Not that I have anything against tractors I just get them stuck 
and can't seem to do any proper work with them because I am not smart 
enough to use the tool.  

Anyway I am rambling so back to lurking but I would like to follow this 
thread also and would appreciate any info that is available offline or on.

Mike

"In a time of universal deceit, telling the truth is a revolutionary act."
                                              --George Orwell

"Beer is proof that God loves us and wants us to be happy."
                                              --Benjamin Franklin

Central Indiana Zone 5b




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