Posted by ss55 on July 19, 2020 at 10:37:19 from (66.216.227.218):
In Reply to: Re: How do they do it? posted by ChampagneNBeer on July 18, 2020 at 22:09:26:
CNB, I noticed from some of your other posts you are looking at getting into farming. I will strongly recommend that you keep the rental cost of the farmland in your financial calculations. Keep separate books for your land holdings and another set of books for your farm operation. The extra detail will give you a much better financial picture of your operations from year to year and help you identify what is profitable and what a loosing effort.
For example: if your 400 acres can be rented out for $250 per acre, pay yourself ( 400 acres X $250 per acre) $100,000 farmland rent. Say in year one you post a total net profit of $150,000, you can identify that $100,000 came from owning the land and $50,000 came from your farming operation. If you and your wife put 2500 hours of labor into the farm that year you and your wife would have earned about $20 per hour for your labor.
Say in year two you post a total net profit of only $80,000 you can identify that $100,000 came from owning the land and your farming operation generated a net loss a loss of $20,000. If the books were combined you might be tempted to say "Whoo Ho" I made $80,000 this year. By keeping separate books you can identify that your land ownership generated another $100,000 that year, the same as if you had rented it out to another farmer, but the farm operations needs some improvement if you want to stay in business.
As you expand, keep separate books for each new venture. Say if you feed livestock, pay your crop operation the market price for any grain, hay and bedding that go into the livestock operation, so you can easily identify where your profits are actually coming from. The profitable operations will be where you want to expand, and you want to either improve or shut down the money loosing operations.
If you really want to get into details, pay yourself and your wife an hourly wage from your farm operations, the same wages as you each could have earned in off-farm jobs. Say $15 per hour. In year one you can identify that: $100,000 of your profits came from owning the land; $30,000 came from your labor and $20,000 came from your farm management skills. In year two: $100,000 of your profits came from owning the land; $30,000 came from your labor and a loss of $50,000 came from your farm management. That information may sometimes hurt to admit, but it really makes it much easier to focus in on what is working for you and what is not working for you.
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