When will your farm pay itself off?
This is the second article on small farm financials.
We've already discussed how to determine how long it will take to go from the planning stages to the implementation stages, but today we're going to discuss how to figure out how at what point your investment will pay off.
That means it's time to talk about breaking even!
What is a "break-even point?"
The break-even point is a calculated date that tells you when all the money that you put into getting your business going will be paid back.
Your break-even point will help you make better choices and avoid financial mistakes.
Don't get discouraged! It's also easy to calculate, so there's no reason for you not to use it.
Time and investments go hand in hand
In more specific terms, your break-even point number is the length of time it takes your total revenue to equal your total costs.
The lower this number is, the better.
Why does the break-even point matter?
Well, you want to make money, right?
At the point that you make your initial investment in your farm, you aren't making money.
What you're doing is making an educated wager; you're betting that if you invest (blank) amount of money in a specific way, it will come back to you in a greater amount.
Whether you know it or not, you make investments all the time. You invest your time into relationships and jobs. You invest money to buy groceries that will feed you and give you energy, which will allow you to make more money than you spent on those groceries.
Every action you take is part of a complicated investment web that propels you through life.
You want your money to return to you quickly enough to keep the cycle of investment going.
So how long will it take for the investment to pay off? Will you break even in 2 years? 10 years? Never?
Can you afford to wait this long to recover all your upfront costs? How will this affect your cash flows?
How to find "break-even"
Defining your break-even point is crucial to planning your Upstart Farm, or any potential business you get into.
You can make this calculation by taking the total upfront operational costs then dividing this by your monthly net profit (revenue-expenses).
This assumes that your ongoing expenses are fixed as well as your revenue so you can make adjustments for this as necessary.
For (a very simple) example, if your upfront costs are $50,000 and your monthly net profit is $2,000 it will take you 25 months (or just over 2 years) to break-even.
It's that easy. All it takes is a little research and some realistic planning on your part. You can do it!
Three things to help you find your BE Point
There are three items that play into your break-even point:
- ongoing expenses
- upfront expenses
Your upfront expenses and break-even point have a direct relationship; the higher your upfront expenses the longer the break-even point.
For example, if you are purchasing land and a greenhouse, your upfront expenses will be higher than if you were to rent greenhouse or warehouse space.
Revenues aren't as easy to project because it will take time to reach 100% operating capacity.
Just because your system is installed doesn't mean your system will be functioning at full capacity immediately. If you want to have a very conservative break-even calculation, add 6 months onto your number to account for the start up time.
Planning your farm can be tricky... We can help
No one said planning your commercial farm was an easy task.
As we mentioned before, doing your homework to make sure the operation will be successful is key.
If there are three things we're insanely passionate about here at Bright they are educating, equipping and empowering small farmers to plan, build and operate successful farms.
We understand the incredible potential these [relatively speaking] small scale farmers have on our food system moving forward and we want to enable more farmers to go commercial and feed people better food.
If you've been thinking about heading in that direction, this is your year too.
Upstart University: Enrolling Now
If you are having trouble, consider enrolling in a planning class such as Upstart University. This program walks its students through planning a business, outlining financials, and managing a system.