Accounting is a language of its own, and you don't need to learn all of it. Three numbers are enough. They answer three different questions, and none of them can answer in another's place:
- The result – does the business make money over time?
- The cash flow – is the money in the account when the bill arrives?
- The margin – what's left of each thing you sell?
A business can post a fine result and still be out of money in March. It can have money in the account and still sell every jar at a loss. That's why you need all three.
1. The result: am I making money?
Income minus costs over a period. This is the number that says whether the business carries itself over time. A positive result means the business creates a surplus – money that can fix what breaks, invest in next season or simply give you security.
Try it with your own numbers:
Does the business make money?
Enter rough numbers for a normal month – the result updates instantly. Pre-filled with an example.
Plus means the business carries itself and can save for the unexpected. Minus means something has to change – price, volume or costs.
For those whose year is governed by visitors: an intense summer and a silent winter. Costs follow sales. Pre-filled with a Gotland producer with a farm shop.
A year that runs a profit can still run out of cash in February. The result says whether the business carries itself – the spread across the year says whether the money lasts all the way.
For those whose year is governed by the growing season: the money goes out in spring and comes in at harvest. Pre-filled with a Gotland vegetable grower.
A year that runs a profit can still run out of cash in February. The result says whether the business carries itself – the spread across the year says whether the money lasts all the way.
A common mistake: leaving your own salary out of the calculation. A business that "runs a profit" only because the owner works for free isn't running a profit – it's being subsidised by you.
The second common mistake: counting your pay as the sum that lands in your account. Pay costs the business roughly 75% more than what you get in hand – income tax is deducted before it's paid out, and on top of the gross pay the business adds employer contributions (31.42%). The calculator does the conversion for you: enter what you want in hand and it shows what the business actually has to earn.
With a season, there is no normal month
Most food producers on Gotland earn unevenly. Calculate on "a normal month" and you get an answer that doesn't exist – either it looks unreasonably good (you happened to think of July) or unreasonably bad (you thought of February). So the calculator has two year tabs, for two quite separate shapes of year:
- The visitor season. The farm shop, the markets, the café, the producer selling to summer guests. Income follows the visitors, and costs follow sales: sell little in November and you buy in little too. The problem is the silent months, when the rent and your pay carry on as usual.
- The growing and harvest year. The grower, the livestock keeper, anyone selling a harvest. Here the money sits in completely the wrong place in time: seed, plants, feed and seasonal labour are paid in spring, long before anything is sold. The costs come before the income, not after.
The year tab gives you the result for the year – the honest answer to whether you can live off the business, peaks and troughs evened out. But it says nothing about when the money is there. That's the next number.
2. The cash flow: is the money there when it's needed?
Result and cash aren't the same thing. You can have a brilliant year on paper and still be unable to pay the invoice in March – because customers pay in 30 days while raw materials are paid in cash, or because all the income arrives in July while the costs arrive in February.
The difference is easy to say and easy to forget: the result measures a period, the cash measures a day. It's the cash that decides whether you can pay.
Season is the most common cash trap for food producers. Here are the same figures as the year tab above, laid out across twelve months:
The year in the bank
The same figures as the year tab above, laid out month by month. Say when the season starts and what's in the account at the start of the year – and you can see where the money runs out.
The curve shows the problem, but it doesn't solve it. And the point isn't being able to draw the dip – it's doing something about it. There are four kinds of remedy, and most people need more than one:
- The price. The fastest route to a deeper buffer is usually a better margin on what you already sell. That's Sales step 2.
- The payment terms. The same annual income can arrive earlier: deposits, prepayment, card payment in the farm shop instead of an invoice, shorter credit terms with shops and wholesalers.
- The product mix. A product that keeps longer, is worth more per kilo and carries a better margin changes the whole curve – it can be sold in November.
- Other income in the low season. Courses, subscriptions, gift cards, work for others, renting things out. Anything that fills the empty months.
Which ones suit you, and how to plan them in, comes in step 4.
3. The margin: what's left per item sold?
The third number is the one that decides the other two. What's left of each jar, loaf or crate once raw materials, packaging, your time and a share of the fixed costs are paid? It's the same calculation as the floor in Sales step 2 – which is why pricing and financial steering are the same thing, seen from two directions.
If you haven't worked out the margin per product, you don't know which products carry the business and which drain it. That's the next step.
And the balance sheet? It exists too – it shows what the business owns and owes at a given moment. You mainly need it when borrowing money or taking on a co-owner. It isn't a fourth number to track; for day-to-day steering the three above are enough.
Do this next
Fill in the calculator with your own numbers – both the month and the year – and write the three numbers down somewhere you'll find them again. Then look at the curve: which month is your hardest? Next step: see what each part of the business gives.