Small-scale crop and livestock production is enjoying commercial success these days, thanks to the high demand for local food. For many farmers in Placer County, this has led to increased profits. And with increased profit, comes opportunity such as maximizing retirement plans, obtaining loans more easily, and a higher sale price for selling your farm should you choose to do so.
But some farmers—maybe even you–have not enjoyed the same experience. Your profits have remained flat, or worse, decreased, and now you’re wondering why.
There could be several reasons, but the most common one is the failure to develop a strategic plan outlining goals and objectives. And while it may seem counterintuitive, summer is a good time for farmers to revisit their financial goals and objectives for the coming year.
Many business owners—including farmers–focus on revenue growth or cash flow for instance, without realizing that the path to both of these depends on being profitable. In other words, focusing on profitability leads to increased cash flow and makes it possible for future growth. With that in mind, let’s take a closer look at how profit is defined and how being more profitable benefits your farm business in the long run.
What is Profit?
Profit equals income minus expenses and easily seen on an income statement that lists the income and expenses of your farm’s business activities over a specific period, typically a year. Profit is not the amount you pay yourself after everything (and everyone) else has been paid.
Income is money generated by business activities such as selling crops or livestock and does not include money obtained through a loan. Likewise, repayment of the loan is not considered an expense. Expenses refer to monetary resources used for business activities that generate income such as buying seed or livestock.
Profit should be your primary goal, because without it, your farm business will not survive, nor will you be able to create wealth for yourself. At Cook CPA Group, we help you set goals for determining profit levels and make decisions based on your goal of increasing profit.
“If my Profits Increase, Won’t I Have to Pay More Taxes?”
As a CPA for farmers, we understand your business, and we understand tax law. While there’s always the possibility of your tax bill increasing, when your farm business is more profitable, there are more options for reducing tax liability. As your trusted advisor, it’s our job to minimize your tax liability while maximizing your profits.
It’s important to understand that profit does not equal taxable income. When a business files an income tax return, expenses are deducted from revenue to figure your business income. Deductions and credits are then subtracted to determine taxable income.
Generally, when profits increase and there is more taxable inncome, there is a corresponding increase in the number of tax planning strategies available. Being more profitable also allows you to take advantage of additional tax credits and deductions you may not have been able to use before.
How Does Having a Profitable Business Benefit Me Financially as Well as Business-Wise?
At Cook CPA Group, we believe that positive taxable income is not always a bad thing. In fact, it shows that your farm business is healthy—and likely to remain so in future years. Here are a few of the benefits of increased profitability and a positive taxable income:
- More profit allows you to accelerate growth, whether it’s developing new products, expanding into new markets, or acquiring another company.
- More sustainable during economic downturns. A financially stable business with steady profits is less likely to feel the impact.
- Tax-saving options that help owners (and employees) create future wealth such as maximizing retirement plans.
- Strong financials that make it easier to obtain a loan for expansion or new equipment.
- Better options for exit strategies. A profitable business is easier to sell, and can be sold for a higher price.
- Increases the financial benefits to owners and creates shareholder value.
Stop Worrying About Taxes and Say “Yes” to Profits.
As a CPA for farmers, we’re committed to helping farm businesses like yours create wealth.
We’ve found over the years that small changes made across the board are typically more achievable for small businesses like yours, and tend to have a more significant impact overall on profits. For instance, the easiest way to increase profits is to reduce costs while increasing product prices. But this isn’t necessarily a strategy that works for every farm business, so it’s important to have an accounting firm like us on your side who understands your farm business.
Contact Us to Schedule a Free Consultation
To learn how we help farmers like you increase the profitability of their farms, visit our Contact page or call Cook CPA Group at (916) 724-1665. What have you got to lose?