Hit the farm financials before hitting the fields
Across the Midwest, farmers are preparing for another growing season. One step often overlooked when planning for the next crop is the analysis of farm financials. The best operations are managed by numbers and using that data to make quick decisions. With the tools currently available, it’s much easier for anyone to get a tighter grip on their operation’s financials.
Annual financial reporting
A common misconception is that a yearly financial statement only needs to be completed for the lending partner’s benefit. In reality, it can serve as one of the most powerful tools in your arsenal for measuring performance. The balance sheet helps paint a picture of the operation’s financial health. It also helps in:
- Structuring capital purchases
- Understanding year-over-year trends of earned net worth
- Recognizing what farm earnings are reflected in the bottom line
A best practice, for any operation, is to ensure all financials are up to date and complete on a regular basis. This should be done annually, at a minimum.
Projections
Common practice is to complete a forward looking cash-flow projection, which outlines expected cash income and expenses over a certain period of time. This report is especially helpful in today’s rapidly changing agriculture environment because it can provide insight when it comes to:
- Determining peak operating loan and cash needs
- Understanding expected financial results for the coming year
- Borrowing an amount that is appropriate for your operation
The overall goal of completing and reviewing projections is to detect potential problem areas ahead of time. You’ll be better positioned to make adjustments or changes to correct practices contributing to those issues, ultimately putting you at an advantage to stay ahead and not be caught off guard.
Understanding your breakeven is essential when it comes time to making crop decisions including crop rotation, grain marketing and farmland leases. A common mistake is to calculate breakeven price above variable inputs. This can lead to a false sense of profitability. It’s easy to underestimate the costs associated with overhead, family living, equipment repair and depreciation.
Running a breakeven analysis is another best practice to adopt. Compeer’s new Margin Manager Tool, available on Compeer.com, can guide you through these calculations.
Overhead expenses
Overhead cost is the measure I see clients struggle with most often. Major contributors include equipment repairs and depreciation, building expenses, grain storage, utilities and, of course, family living expenses. Understanding the real costs associated with these items and making sure they are accurately reflected in the income/expense projection may seem like a tedious process, but it’s all very important to proper budgeting. You will be better prepared and avoid surprises when you take the time to account for your expenses.
Many resources are available today to make managing your farm’s finances easier than ever. A consistent, methodical approach to managing your business’ finances will help your farm endure today’s challenging environment. With a little homework, you can find the right financial tools and resources. Some can be very simple, while others may be more complex. Start with where you are comfortable and evolve those tools as you are able.
Bob Foerder is a Financial Officer working with clients out of Compeer Financial's Rock Falls, IL office.