Making It Happen: Profitability and Success The Carrot Project

1. Making It Happen: Profitability and SuccessThe Carrot Project

2. Technology Check-In • “Testing, 1, 2, 3” – Can you hear me? • Call in if internet is slow • Webcam (two clicks) • Chat window • Mute when not talking Technology issues? • Send chat message to Kira • Email Kira at kbh@thecarrotproject.org Questions? • Type them in the chat window, or raise your hand • Julia will answer questions in chat • Unmute yourself and ask.

4. Working Framework • Successful farms are managed as businesses • Develop understanding of financial management tools • Use risk management as a lens for examining business decisions

5. Can I Pay My Bills?Is A Capital Investment Worth It?Is This The Right Price?Should I Add A New Product Line?

6. Making It Happen: Key Elements • Based on farmers’ experience • Skill development training • Hands-On • Tools: Surveys, Lecture, Case Studies, Practice, and 1:1 Advising

7. Making It Happen: Day 1 Agenda • Introduction • Introduce Case Study and Key Concepts • Financial Toolbox • Scenario Planning • Cash Flow Budgeting • Discussion: Making Real-World Connections • Closing: Summary, What to Expect on Day 2

8. Introductions! • Who you are? • What’s your farm business?

9. Disclaimer The numbers in this presentation are fictitious and used for illustrative purposes only. As you plan and project for your own business, you will need to research and calculate the financial data based on your specific economic reality.

10. Framework for Today’s Session • Can I pay my bills? • Is a capital investment worth it? • Can I afford it? • Does it make sense? Cash Flow Budgeting Scenario Planning Financial Toolbox

11. Question 1: Can you pay your bills? • Cover operating costs • Pay loans and debt service • Support yourself and family • Save for college and retirement

12. Can you pay your bills? Revenue/Sales $100,000 Operating Expenses $ 60,000 Net Income $ 40,000 Debt Service $ 12,000 Net Cash Flow from business $28,000 • What are you bills? • What do you need to live? • Do you have off-farm income?

13. Question 2: Does the investment make sense? • Does the increased revenue cover the increased costs? • Does the increased profits cover debt service? • Is the increased cash-flow worth the effort of the investment? • Short-term (first year) • Long-term (5 years out) • What happens if things go wrong? Does the investment still make sense?

14. Scenario Planning

15. Tool #1: Scenario Planning What Laying out scenarios to explore opportunities and risks in a changing enterprise. When To examine ‘what if’ opportunities and risks, i.e. crop failure, pricing change, new enterprise: • what future conditions or events are probable • the consequences or effects of decisions • how to respond to, or benefit from a new situation

16. Why Bother: Scenario Planning • Understand where you’re most profitable • Reduces stress and uncertainty • A decision making tool as you grow your business • Can I afford new equipment? If so, when? • Can I afford to expand? • How can I become more profitable? • How can I even out the ebbs of flows of cash?

17. Scenario Planning - Process • Review historical financials • Identify changes: • Revenue Increases • Fixed vs. variable costs • Incremental expense vs. sunk costs • Outline changes based on new scenario • Organize your numbers • Decide – Does this make sense? • Sensitivity Analysis – What happens if…?

18. Scenario Planning - Process • Review historical financials • Identify changes: • Revenue Increases • Fixed vs. variable costs • Incremental expense vs. sunk costs • Outline changes based on new scenario • Organize your numbers • Decide – Does this make sense? • Sensitivity Analysis – What happens if…?

19. Looking Back to Look Forward • “Performance data quoted represents past performance; past performance does not guarantee future results.” But it’s your best predictor

20. Fixed vs. Variable Costs A periodic charge that does not vary with business volume. • Insurance • Accountant • Bank Fees Fixed Costs Variable Costs • An expense that varies with production output. • Seeds and Seedlings • Animal Feed • Labor/Payroll

21. Step 1 – Review Historicals Discussion Questions: • What do you think of the current business model? Can they pay their bills? • What is their biggest expense? • What could they do to improve profits with current business model? • What do you think of their growth opportunities? • Do you agree they should build a farm-stand? • What are their other options? • How would you decide?

22. Scenario Planning - Process • Review historical financials • Identify changes: • Revenue Increases • Fixed vs. variable costs • Incremental expense vs. sunk costs • Outline changes based on new scenario • Organize your numbers • Decide – Does this make sense? • Sensitivity Analysis – What happens if…?

23. Top Down Sales Projections “My business will grow by 60%” or “My revenue will increase by $120,000” “If revenue in 2017 was $204,000, then I think I can generate $$XXX in 2018”

24. Break it down: Option 1

25. Break it down: Option 1 Can you handle the production?

26. Break it down: Option 2 • Total Revenue Projection = $315,000 • If the farm-store is open 150 days per year… • $2,100 per day • If the average customer purchase $40 of goods… • 52 customers per day • If the store is open 8 hours per day • 7 customers per hour What’s your marketing plan?

27. Bottom-Up Sales Projections “This is the level of production I think my business can handle” Total Projected Revenue: $270,000

28. Understanding Expenses • What are the start-up expenses? • Will you need a loan or grant? • What is the incremental revenue? • What is the incremental expenses?

29. Ask Yourself Some Questions… Starting Up • What equipment needs to be purchased? • How much will it cost to install/ship/build? • How long will it take? Financing • Do I need to borrow money? • How much and for how long? Day-to-Day Operations • What will it take to run the enterprise on a daily basis? • What incremental (new) expenses will I have? • Will I have increased efficiencies? Revenues • How much can I expect to earn? • When can I start earning revenue?

30. Group Discussion: Identify Incremental Changes Identify Fixed and Variable Costs • What expenses will change with an increased volume of sales and what will stay the same? • What expenses will they continue to have? Identify Incremental Changes • What new expenses will they have?

31. Key Points • Not all expenses will increase the same way • Distinguish between current operations (sunk costs) and improved operations (incremental costs)

32. Scenario Planning - Process • Review historical financials • Identify changes: • Revenue Increases • Fixed vs. variable costs • Incremental expense vs. sunk costs • Outline changes based on new scenario • Organize your numbers • Decide – Does this make sense? • Sensitivity Analysis – What happens if…?

33. Putting the Numbers Together Start Up Ongoing • Grants or Loans • Retained Earnings Sales Revenue Cash Inflows • Daily Operating Expenses • Incremental expenses • Increased Efficiencies? • Equipment Purchase • Installation, shipment • Operating Expenses before revenue Cash Outflows

34. Group Discussion : Step 3: Outline Changes Based on New Scenario Start Up Ongoing Cash Inflows Cash Outflows

35. Annual Cash Flow • Revenue $ 327,100 • Current Expenses • Production Overhead (Variable) $ 206,634 • Overhead $ 30,000 • New Expenses • Staffing/Labor $ 35,000 • Utilities $ 5,000 • Repairs and Maintenance $ 3,000 • Net Cash Flow From Operation $ 53,000 • Loan Repayment $ 15,000 • Total Cash Flow$ 32,466

36. Scenario Planning - Process • Review historical financials • Identify changes: • Revenue Increases • Fixed vs. variable costs • Incremental expense vs. sunk costs • Outline changes based on new scenario • Organize your numbers • Decide – Does this make sense? • Sensitivity Analysis – What happens if…?

37. Steps 5-7: Does It Make Sense? • Putting the numbers together on a dynamic spreadsheet • Sensitivity analysis • Decision making

38. Scenario Planning - Process • Review historical financials • Identify changes: • Revenue Increases • Fixed vs. variable costs • Incremental expense vs. sunk costs • Outline changes based on new scenario • Organize your numbers • Decide – Does this make sense? • Sensitivity Analysis – What happens if…?

39. Sensitivity Analysis – What if??? What if sales are lower? • Revenue $ 327,100 • Current Expenses • Production Overhead (Variable)$ 206,634 • Overhead $ 30,000 • New Expenses • Staffing/Labor $ 35,000 • Utilities $ 5,000 • Repairs and Maintenance $ 3,000 • Net Cash Flow From Operation $ 53,000 • Loan Repayment $ 15,000 • Total Cash Flow$ 32,466 What if expenses are higher? What if you have to borrow more?

40. What is the breaking point? • Realistic – what’s likely to happen? • Conservative - What if everything goes wrong? • Optimistic – what if all the stars align?

41. Tool #2: Cash Flow Budgeting

42. Tool: Budgeting for Cash You know, on the whole, the growth strategy works… but can you manage the natural monthly ebbs and flow? Use when you: • Manage the business • Forecast a decision’s impact on cash flow • Consider a capital purchase or borrowing

43. Do you need to borrow money?

44. Cash Flow and Cash Position Negative cash position… Do you need a loan?? Positive cash flow, positive cash position Negative cash flow, positive cash position

45. What Adjustments Do You Make? Because you recover, you just need to borrow to get over the hump Ruh, Roh!

46. Discussion – Implementing New Habits • Can I pay my bills? • What do you think about the farmers’ ability to pay their bills? • What tools and skills did you learn to answer this question? • Do you understand your expenses and profit needs? • What new habits do you need to better understand how to pay your bills? • Should I make an investment? • What do you think of Sam and Rachel’s investment decision? • Are you planning any investments in the near future? • What information do you need to evaluate?

47. In Summary • Understand the nature of your revenue and expenses • And how changes in your business change profits • Factor in all cash flows • Operating • Financing • Investing • Test Scenarios • Conservative • Realistic • Optimistic • Track, Measure and Adjust

48. Preview for Day 2 • Is this the right price? • Should I add a new product line? Breakeven Analysis Cost of Production Financial Toolbox

49. Questions?

50. Homework • Read Case Study for Day 2 • Review videos at www.thecarrotproject.org • Contact Kira: kbh@thecarrotproject.org • ”See” you on February 1