Accounting #$%^#

Discussion in 'Homesteading Questions' started by Jena, Sep 23, 2004.

  1. Jena

    Jena Well-Known Member

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    I actually have a degree in business administration and planned to go on to a degree in accounting. Really, really, really glad I didn't (or perhaps I should have)....

    First of all, I have 40 products, each with it's own price. Some products sell at a loss, but overall I make money. For example....pork. The last batch of hogs I had done cost $1.63/pound (cost of hogs and processing). I sell pork chops for $3.59, but I sell neckbones for $1.49. It appears I lose money on neckbones, but overall, when that whole hog is sold, I'm ahead of the game. Make sense?

    Also, my cost for the products changes all the time. I use sale barn price on the day I haul them in for slaughter (except chickens, they are at cost to raise them).

    Second, I sell in various places. One is 3 blocks away. Another is an 80 mile round trip. Each has it's own fees for permits or what have you.

    Third, different things sell better in different places. One place buys chickens like crazy, but doesn't care for pork. Another loves pork, but never touches a beef steak. Just different markets I guess.

    I have all my sales in a spreadsheet by various weeks. I can tell you exactly how many pounds of what I sold for each week, but not broken down by each venue. I suppose I need to do that. Then I can figure each venues costs and the actual profit made based on what cuts I sold there. THEN I can see where I make the most money or where I might be losing money. If I drive 80 miles to sell soup bones, I'm going to lose...

    The whole reason behind this is to try to plan my sales strategy for next year. I finally got the low-down on requirements in a nearby city and am trying to decide if it's worth a shot. The reason the decision is tough is because they charge $50 a DAY for a "transient merchant permit" since I don't live in that county (not to mention the state). Advertising is also about 5 times what I usually pay. Heck, it might be cheaper to rent a garage or something...but anyways...

    How do I use all my data to try to determine if selling there (or elsewhere) will be profitable? I can't even figure up that I have to sell x pounds of meat while there, since each cut has a different profit. Would an average be ok to use? Average what? Cost per pound? Profit per pound? What do I base my average on? Everything I have (including the pig tails that simply won't sell) or an average of what I usually sell in a week? Which way gives the most conservative results? I'd much rather be making more money than I thought I was, then vice versa.

    If I can figure out that part, it's a snap to add in the costs of getting there, fees, etc.

    Once I get started, I can track it to see if I'm ahead or not, but the whole projection thing is the killer.

    Any sane advice would be appreciated and yes...I do have an appointment to see a business counselor dude, but it's a couple weeks off.

    I'm going to bed and I am NOT counting any sheep :)

    Jena
     
  2. uncle Will in In.

    uncle Will in In. Well-Known Member Supporter

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    Jena, you are looking at selling poor cuts for less than the average cost of all cuts as a loss. If you couldn't sell them at all it would then be a loss. In your opperation you need to sell all parts of the animal before much profit appears even though you may have sold all the higher priced cuts that brought way above you average cost.
    Even though you may have extra overhead in being able to move the poor cuts, it is a nessesary cost of selling the entire hog, and should be averaged into your equation of profit margin.
    I guess what I'm saying is that if you are selling out of $3.50 cuts and still have the $1.50 cuts on hand, The higher cuts were too cheap or the lower cuts were to high.
    Don't count your chips until the game is over, and in this case is when the entire animal is sold.
     

  3. ajoys

    ajoys Well-Known Member

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    It depends on how accurate you want to be. If you want to break it down to the exact penny etc.... you need to do a cost analysis (which is actually just developing the product cost equations per product) on a product by product basis. It takes a long time to do but once you have it all in the computer in a database or spread sheet you will be able to do all kinds of things with it that will really be able to show you how to maximize profit.

    Figuring out what your products cost is simple, but with out any historical sales data it will be a guesstimate on how well something will sell in a new location. Projection is always a crap shoot. What you can do for new locations is find out what your costs will be, use an average of types of products sold based on other similar venues and determine what it would take to break even. If you have to sell more product then normal then you will know that most likely it won't be as easy to make a profit.

    you could group similiar types of products and develop averages based on pounds etc... but it won't be as accurate.

    Personally, I would break it out by individual product. It takes a little more time but once it is done it is just as fast as doing it an easier way.

    A lot of times companies can take a product and try it out in a test market to determine there projections but when you have multiple venues and each one is so different it probably wouldn't work for you.

    Most "larger" companies will break labor and overhead down to a dollar per hour figure. Labor is pretty simple to determine, basically just your average direct labor rate. Overhead is determined by Total overhead costs divided by total labor hours spent making all the products in one year or some percentage of available capacity. This determines your dollars of overhead per labor hour spent making the product. Then you can add up the two and come up with one dollar per hour number which includes labor and overhead. Most places call this a loaded labor rate since it will include your overhead.

    This simplifies the process. Add your part cost, determine how much labor is spent making the product and then times that number by your loaded labor rate. Add that number to the part cost and you will have the cost of making the product.

    You just have to start working on it and it will all come together. Every type of product is done a little different. I have never worked with animal products, just electronics so I am sure for your situation it won't be as straight forward.

    Product costing and sales projections are two very different situations. One is very straight forward, the other is a best guestimate based on historical data and past experiences. The more experience you get the easier and more accurate it will get.

    I use to do a lot of product costing and as well as determining manufacturability for new products so I worked right along side marketing and R&D starting with the concept of products. Marketing always starts with the projection that they are going to sell a bazillion of the product and it just goes down from there. :)








     
  4. Janon

    Janon 993cc Geo Metro

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    If a cow was made up of only 3 parts: hamburger, steak, and roasts... and you have your cow butchered and you get 50lbs of hamburger, 30lbs of steak and 10lbs of roast. Lets say the going rate for hamburger is $2 per pound, $4 per pound for steak and $6 per pound for roast
    50lbs hamburger x $2 per pound = $100
    30lbs steak x $4 per pound = $120
    10lbs roast x $6 per pound = $60

    Total is $280, and of that $100/$280 is hamburger, so hamburger represents 36%, steak represents $120/$280 = 43% and roast represents $60/$280 or 21%

    What does all this mean... it means that 36% of a cows market value is made up of hamburger, 43% is in steak and 21% in roast. I suppose you could also use these ballpark figures to better estimate your costs. Eg. If a cow cost $200 to grow and butcher, 36% of that is hamburger which equals $72, $72/50lbs of hamburger = your cost of $1.44/lb for hamburger. Steak = $200x43% = $96/30lbs = $3.20/lb and roast = $42/10lbs = $4.20 per pound.

    Using an avg. cost per pound and then extending that to every part of the cow would make it extremely difficult to determine what you can make money on... or even if you can make money. Steak and soup bones are not valued the same. Also notice with the above formula... there is a point where it cost more to grow a cow than you could possibly make in profit. In the example above, if it cost you anything more than $280 to grow a cow which makes 80lbs of the above 3 items, you'd lose money on every cow.

    cheers,
     
  5. boxwoods

    boxwoods Well-Known Member

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    Use excel or lotus123 to make up a work sheet that calculates certain columes to tell you what you want to know.

    I would make one for buying houses. Just put in the cost of house and my sheet would tell me the estimated land taxes, mortgage, insurance, closing cost, etc
    by putting in tentative rental fees, it would show how much I would make at what rent. etc

    Once you get the formulas in your sheet, one entry would give you your cost, or profit, or loss.
     
  6. MorrisonCorner

    MorrisonCorner Mansfield, VT for 200 yrs

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    Sounds to me like you might want to do a break-even on the new sales location.

    Annual Sales = actual cash sales

    Total Cost of Goods Sold = consumable items used to make those products (seed, fertilizer, vet bills)

    Gross Profit = Annual Sales – Cost of Goods Sold

    Gross Margin = Gross Profit / Annual Sales (to make it a percentage, multiply by 100)

    Overhead = Your annual fixed costs, infrastructure items divided by the number of years of their useful life, for example.

    Net Income from Operations = Gross Profit – Overhead

    Breakeven Sales = Overhead / Gross Margin

    Breakeven Point for a New Investment = Annual Additional Overhead / Breakeven Sales

    You know how much your annual sales are now, you can figure out how much in additional sales this new location must add to be a worthwhile venture. You may go ahead anyway even if on paper it doesn't look worthwhile, counting the "loss" against "advertising" because of the additional exposure, but you'd have a good overview of where the cash is going.

    I'm with you though: I have a degree in accounting, and Yeach.
     
  7. Jena

    Jena Well-Known Member

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    I do have a spread sheet that I put in the total pounds for each product. It then tells me what % that product is, how much I make per pound on it and how much I make/lose on that particular item. Here's an example:

    Sausage 0.07542% $94.58 58 $1.63 $3.59 $1.96 $208.22 $113.64

    I had 58 pounds of sausage, which is .075% of the total meat. Sausage costs $94.58 ($1.63 per pound). I sell at $3.59, make $1.96/pound. Total sausage sales are $208.22 so I made $113 profit once I sell all 58 pounds.

    I need to build one that will take each cuts profit and figure it by each weeks sales, pain in the patootie, but once done I guess it's worth it.

    This really does tell me which cuts make the most money! It is not always the most expensive thing. I may make $6/pound on steaks, but since they are a small % of the total animal, I actually make more over all on other stuff.

    That spreadsheet is very useful.

    I am happy to hear that projections are not as scientific as I am thinking they are. You read the business sites and they make you feel like an idiot if you can't come up all these fancy market projections and stuff. I would rather keep it like this....I sell alot of meat in this town. The population is 9000 and there's lots who grow their own. The other city is 65000 people with few producers. That tells me that I should be able to sell alot more meat!

    I do need to figure the costs of selling it there though and thank you Morrison, I think I can now. I will go back to my spreadsheets and figure all that stuff up.

    Thanks everyone.

    Jena
     
  8. fordy

    fordy Well-Known Member

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    .............All , the advise you have rece'd so far has been excellent , and appropriate . But, you have 2 cost factors that are going to make your spreadsheet profitability and breakeven points an ongoing battle . The cost of your product which fluctuates on a daily basis ....AND....the cost of fuel . My suggestion would be to visit a used book store and procure a somewhat recent edition of the Basic COST Accounting for Accounting majors . And, study it very thoroughly and try to visualize the concepts as they would apply to your business . In addition , I Wouldn't consult with that Business consultant . ....UNTIL...I had mastered the cost accting fundamentals. Why?? because , you need to beable to discuss , in Detail , on a Conceptual Basis, the issues involved in how your spreadsheets are going to calculate both a Breakeven point and a Profit for each specific order .
    .............It , is usually the Case , that , you will receive an order from a repeat customer that will be either a loss or just breakeven at best , but your other orders will more than offset that situation . This is where the Accuracy of your spreadsheet analysis will reveal to you when you are operating at a loss\profit and then you can make decisions based upon verifiable data . ....fordy..... :eek: :)
     
  9. BCR

    BCR Well-Known Member

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    In projecting you are still making assumptions...on sales and on overhead. Make sure you factor ALL the startup costs of the new location. Utilities, phone, printed materials, postage, etc.

    For fre, confidential business advice, try your local SCORE office or visit them online at SCORE.org
     
  10. Jena

    Jena Well-Known Member

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    What do I do with my inventory? I know what's it's worth at retail and what it cost. Since inventory is not sold, do I deduct the costs of goods in inventory from my total cost of goods sold? Makes sense to me.

    Also...when I get to breakeven for new investment, it tells me a percent. Does that mean I have to increase sales by that percent? Or did I screw something up?

    Thanks

    Jena

     
  11. 65284

    65284 Well-Known Member Supporter

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    "The reason the decision is tough is because they charge $50 a DAY for a "transient merchant permit" since I don't live in that county (not to mention the state). Advertising is also about 5 times what I usually pay. Heck, it might be cheaper to rent a garage or something...but anyways..."


    A friend who ran into the same kind of problem rented a PO box. Used that as an address.......problem solved.
     
  12. MorrisonCorner

    MorrisonCorner Mansfield, VT for 200 yrs

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    Hmmm... I do not deduct the cost of creating my inventory from cost of goods sold because the money is gone and there is no guarantee I'll sell that inventory. A number of years ago when we were selling lamb from a retail store we reached a point where we had an entire freezer (chest) packed (and I mean packed) with kidney, liver, and ground lamb. Much of it 3 or so years old. It simply did not sell.

    We carried it on the books as inventory, and its very existance skewed the way we viewed our profits. In the end we sold the entire freezer contents for dog food... at WAY less than it was valued on the books.

    Ever since then I've valued inventory at zero for the purposes of calculating break even. Infrastructure I'll carry with depreciation, but inventory I value at zero. I'd rather err on the conservative side than be unpleasantly surprised with a freezer full of dog food.

    Kidney anyone?
     
  13. deberosa

    deberosa SW Virginia Gourd Farmer!

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    OK, Ms computer nerd here. You could possibly still recover sales per site if you did them on different days.

    If you know which day you were at each site and put that in a different table, and if you had your sales by day, then by connecting on the days you could get your sales per site.

    Not the ideal setup but could get you planning data for next year at least.

    Also, I am currently supporting an accounting system that allows for "Activity codes" on transactions. THis is a layer on top of the regular revenue, expense ledger structure. If you select the activities you want to track, then apply that code to all transactions regardless of the portion of the GL they are in then you can pull reports on a total picture for that Activity.
     
  14. Jena

    Jena Well-Known Member

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    I gotcha. I can at least keep in mind the cost of it if my figures get too depressing!

    What about the breakeven sales for a new investment? It is like .37. does that mean I have to increase sales by 37% to cover it? That would not surprise me as it is a pretty hefty investment compared to what I've been doing.

    Thanks
    Jena
     
  15. poorme

    poorme Well-Known Member

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    holy smokes, i think you are making this way too complicated.

    what exactly are you trying to figure out?

    you don't have an option of producing more/less of any of the animal parts. you've got them, you sell them for what you can get.

    it costs you the same to produce a pound of snout as a pound of loin so forget that aspect.

    when analyzing which markets to go to i'd worry about total dollar sales only.
     
  16. Maura

    Maura Well-Known Member Supporter

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    Good grief! My head is spinning.

    You can sell the tails as dog food. I feed my dog a natural diet and just lost my butcher, who sold me chicken backs/necks/wings for 59 cents a pound, which is cheaper than cheap kibble. I also purchased liver and tongue for the dog. I would be interested in organ meat (including lungs and that sort of thing) to help round out my dog's diet. I'm sure there are other people who are feeding their dogs and cats raw food. You can take all of your will-not-sell meat, grind it up, and sell it to pet owners. This would create a ready made market not only for your special blend, but also for those neck bones and soup bones. When you set up your stall, you could have a form for pet owners to fill out if they'd like frozen dog food and bones delivered four times a year (prepaid). They may even be willing to drive out to your place to pick it up. This would basicly be a modified mini CSA program for pet owners.

    If you picked up customers that keep coming back to you, even if only for the leftover stuff, it might make the trip worthwhile.
     
  17. Mike in Ohio

    Mike in Ohio Well-Known Member

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    Hi Jena,

    One thing I haven't seen anyone mention is that you need to choose an accounting method. By this I mean FIFO (First In First Out) or LIFO (Last In First Out). Generally FIFO makes more sense, esspecially for perishables.

    You should have an inventory account with sub accounts for each SKU (product item). As you sell you simply remove that item from inventory. You assume that the cost is for the oldest item in inventory. If you can't sell it then you still deduct it from inventory but there is no revenue associated with the cost of that unit.

    We don't have 40 SKUs. More on the order of 12 SKUs.

    Hope this helps,

    Mike