How to Interpret your Profit & Loss Statement

When you are running a mushroom farm your number one thing you have to pay close attention to is where you spend your money and moreover how you can save it. But before we can investigate where you can save money on your farm we should start before thinking about your goals.

Ask yourself the question “Why do I want to save money?” Here are some examples.

  • Because at the end of the month there is no money left.
  • Because I want to expand my business.
  • Because I must raise my salary.

How you will answer this question will determine what you have to focus on in order to achieve your goal. If you answer like the first example, then that could mean that you have an income or an expense issue or worst both.

If your answer is similar to the second example, then several pathways were possible. One would be, that the demand is growing and growing, and you can’t keep up with your current production. Another one would be that you want to diversify your income sources and to for example trying to reach more customers through a CSA program (community supported agriculture).

If your answer is like the third example this will raise the question “Why do you have to raise your salary?”

Independent how you answer this question you need first to know where you spend your money in the first place. And here a profit and loss statement comes in handy.

If you don’t have one yet I recommend that you read my article how do I keep track of my expenses. In this article, I explain in detail how you use a simple spreadsheet to track your income and expenses.

For this article, I will use a simple spreadsheet (table 1) which consists of four parts.

Part 1 contains all your different income sources and your monthly numbers from them.

Part 2 contains all your different expenses throughout the year.

Part 3 will track your profit and loss on a monthly base and on a cumulated base.

Part 4 will summarize each line, the average number for each line back as well giving the percentage of this line according to total income or total expenses.

Table 1: Example of a Profit/Loss Statement

Table 1: Example of a Profit/Loss Statement

First, you will analyze your income sources (table 2) and see if something unusual has happened. This could be that one of your income sources didn’t bring enough income than you hoped, or the income fluctuated more than expected.

It could be quite the opposite and you had one or two amazing months where you are crushing it.

Knowing what is going on in this section prepares yourself for the future and you can adjust your business accordingly.

Table 2: Example of a Profit/Loss Statement (Part 1)

Table 2: Example of a Profit/Loss Statement (Part 1)

The same goes for the expenses (table 3). You should go through each and every position and check it for trends or sudden jump both up and down. To get a better idea about these changes I will go over five different positions and explain what the reason for the change could be.

The first change in this example is the amount of money you spend on your car, mainly fuel. While during the winter your business is closed, and you, therefore, don’t spend any money on it the costs start to rise during the year with a peak in July, just to fall until November.

This up and down directly correlates with your income and therefore with the number of products you are selling each month. One reason for that could be hence that you visit more farmers’ markets to sell your products.

The next point on our list is electricity. Here again, we see first an increase until August and then a decrease towards the end of the year. These correlate yet again well with our production throughout the year.

But if we look closely while we spend July and August the same amount of money on electricity, we had less income and therefore production in August. This difference could, for example, be explained with higher temperatures during August and thus with the need for more AC. If this would be true, then we should see also an increase in water consumption. Which for demonstration purpose only we don’t see in the example.

Next up is the money we spend on the substrate. In the first half of the year, everything seems normal, because with higher production (higher income) we expect a higher need for substrate and therefore more spending. But the amount of money stayed high until the end of the season.

This could mean several things:

  • Increase in the purchase price
  • Less yield
  • More contamination
  • A combination of both

To understand each one of them, especially the last three we have to look more closely at your production itself. To do so we would need your spreadsheet in which you track every step from mixing until harvesting.

If you want to learn more about how you can track your production, then you can find everything you need to do so in my article.

The fourth point – bags – shows an uptick in value. If we look closely, we will likely find that the manufacturer increased the price.

And finally, the fifth point – waste. Here we see an upward trend. In combination with what we saw with the substrate, our suspicion about the yield or contamination is getting stronger. To analyze and understand this better we really have to look at the tracking of the production.

Table 3: Example of a Profit/Loss Statement (Part 2)

Table 3: Example of a Profit/Loss Statement (Part 2)

If we look at table 4, we see in the first line that our farm costs us ($3,905) per month. Because we have no income in four out of the twelfth month (Dec – Marc) we are in the first half of the year negative.

But that is only true for the first year (table 4). In the second year of running our farm, we are down to only two months in the negative (table 5) and finally, in the third year, no month dropped below the $0 mark. But that is only true if nothing else would change.

Table 4: Example of a Profit/Loss Statement 1st year (Part 3)

Table 4: Example of a Profit/Loss Statement 1st year (Part 3)

Table 5: Example of a Profit/Loss Statement 2nd year (Part 3)

Table 5: Example of a Profit/Loss Statement 2nd year (Part 3)

Table 6: Example of a Profit/Loss Statement 3rd year (Part 3)

Table 6: Example of a Profit/Loss Statement 3rd year (Part 3)

With that said your P&L statement can’t only be used to analyze where things are changing and where you lose money or save money but also to use it as a forecast model. This is normally done for up to three years.

If you want not only a simple forecast but you want to simulate different scenarios like for example increasing costs, lower-income, or lower yield than you have to insert some formulas into your spreadsheet. With these simulations, you then get a better sense of what is going on onto your farm.

The last section we will take a look at is part 4 (table 7). Both the sum and average are interesting to read but more interesting is the percentage of each position according to the expenses or to the income. To make use of these values you should develop a rule of thumb at which you will analyze a position more in detail.

For example, you can check as a rule of thumb is something is greater than 5%. In this case, you would analyze the positions rent, marketing, depreciation, spawn, and your salary. Speaking about your salary as you can see the salary makes 37% of your expenses which comes with no surprises.

But it makes clear that any change here will directly impact your farm. Which means if you want to or must spend more money on your personal account than your farm must make more money in order to support these expenses.

Table 7: Example of a Profit/Loss Statement (Part 4)

Table 7: Example of a Profit/Loss Statement (Part 4)

As you can see having a profit/loss statement and understanding how to interpret in combination with your tracking reports helps you to run your mushroom farm more efficient and make more money.

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