Records feed into reports, reports into decisions
Being proactive with managing the financials for your farm business is important, especially during recent volatile cycles in various agricultural commodities. The farm financial model is a concept for understanding the financial flow of the farm business.
Farm Financial Model
To understand the farm business’ records, one needs to understand the purpose records serve to and for the farm manager. A view of this is offered in the farm business financial management model. Keep in mind that a farm manager wants to make the best decisions possible affecting the future of their farm business.
The model begins with records which details collecting and organizing of the farm business’ production (physical) information and financial (income/expense) information. The tool utilized for record keeping is an accounting system. If a farmer is only undertaking this for tax reporting, their task is complete. However, further details are needed for management decisions.
Records provide the production and financial information necessary to complete the management reports. This second step continues the organizing function and extends what the farmer does into analyzing and reporting of the farm business’ financial position and financial performance.
These are two key and insightful concepts relating the financial strength of the farm business at a point in time (position) and how well the farm business has performed over time (performance). This insight is captured in the financial statements, including the balance sheet, income statement, statement of cash flows, and statement of owner equity.
Financial statements should be prepared on a consistent basis. The balance sheet should provide values for the beginning and ending of a time period, e.g. January 1st and December 31st of the same year. The balance sheet reports the financial position at each point in time. The income statement, statement of cash flows, and statement of owner equity cover that same time period, e.g. January through December of a year.
The income statement shows the financial performance for the time period. The statement of cash flows and the statement of owner equity will assist in understanding how different activities impacted financial performance during the time period.
Through the second step, the farmer has completed the historical review and understanding of the farm business’s financial position and performance. Financial measures, as absolute measures or financial ratios (Financial Scorecard) can be most informative when analyzed to the same measures in the previous time periods or benchmarked to comparable farm businesses. This financial analysis provides a basis to plan for the future and draft pro-forma financial statements.
Functionally, the farmer wants to understand and make business decisions, considering the feasibility, profitability, and risk-ability of the farm business. The farmer needs to utilize the production and financial information from records and management reports and transform this information to help evaluate decisions. The common tools used include cash, partial, and enterprise budgets.
The financial model is linear and circular. Records feed into reports and reports into decisions. Reports see additional information from records and call for additional decisions to be made. Reports make sense of the records, allowing farmers to integrate financial sense into production decisions.
Extension educators and state specialists have updated farm financial factsheets to assist farmers in improving their financial management skills. These articles are available in English, Spanish and Hmong, and can be found on Extension’s Farm Management Program website under Financial topics.
Educators are continuing to develop new material, including instructional videos for each factsheet and a self-paced online course, Farm Pulse, that can be used at a time that works best for farmers and from the comfort and safety of their own homes or offices. If you have questions or are interested in this course, please contact Katie Wantoch at firstname.lastname@example.org.
Katie L. Wantoch, is an Associate Professor and Agriculture Agent for UW-Madison Division of Extension of Dunn County