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HIGHLY EFFECTIVE FINANCIAL HABITS FOR FARMERS

As the clock ticks down towards the end of the year, farmers are spending less time in the barn and more time completing the dreaded “P” word…paperwork. It comes as no surprise that compiling farm records and financial statements is extremely important, but it can also be a tedious task with its fair share of headaches.

According to Professor of Practice and Farm Management Outreach Specialist at the University of Wisconsin-Madison, today’s successful farm operators are using detailed financial statements to identify the most profitable farm enterprises for their operation, determine per unit production costs, track trends and financial progress in the business and to create comprehensive business plans.

However, if records are not kept up-to-date or accurate, sound business decisions cannot be made. “Records and the management decisions made from prepared financial statements are only as good as the data entered”. “The old adage, ‘Garbage in – Garbage out’ really does apply to financial records.”

Use your accounting processes to evaluate, forecast and plan

Think about how your farm has grown in size and scope in the past decade. Has your financial reporting followed suit? Would you define your financial management and bookkeeping processes as a competitive advantage or an area to improve? “Your financial management system should help you make better and data-based decisions,” says management consultant. “A good system will help you respond quickly to unknown challenges or opportunities, such as renewing leases, pricing grain or pursuing new ventures.” Profitable farmers create financial habits that separate them from others. These habits, consistently applied through the years, add up, and the results are evident. Here are a few tips to consider:

  1. CREATE A PAPER TRAIL.

Always keep supporting source documents for what you are paying, receiving for income, sales, money transfers, loan advances/payments and so on, advises financial manager of tax and accounting. “Having this paperwork will help in making sure all items are accounted for and be a resource to look at later”.

  1. RECONCILE AND EXAMINE FINANCIAL DATA ON A REGULAR BASIS. 

Expert suggests reconciling the bulk of your records each month; if you wait three or six months you can easily lose track of balances and inventories. For grain farmers, he recommends producing and reviewing farm financial statements twice a year — midyear and year-end. This will help you with tax planning and forward-looking decisions, such as renewing leases, booking inputs and setting budgets.

  1. ANALYZE PROFITABILITY FROM SEVERAL ANGLES. 

Farm profitability is the ultimate concern and focus for everyone in your organization, so tracking it, which can be complicated, is essential. He suggests tracking profitability in multiple ways:

  • Revenue per profit area: This metric measures profit per unit of farmland, such as dollars per acre. While a great metric, it shouldn’t be a standalone measurement as it typically does not include costs associated with land use or maintenance.
  • Economic farm surplus (EFS): This measure calculates both the cash and physical profit performance of your farm assets, including livestock and land. Brown says EFS is a great way of forecasting future performance and growth and can help you see overall performance across profit centers.
  • Month-to-month profits: This measurement allows you to gauge current profits but might not provide the long-term view you need for strategic planning.
  1. KEEP YOUR ACCOUNTS SEPARATE. 

A common mistake farmers make, is commingling personal and business accounts. “When it’s all blended together, you can’t keep track of each, and you don’t know which enterprises are profitable or not”. Aim for consistent coding. Everyone on your team needs to use the same coding strategy. This includes accounts, centers, fields and inventory items.

MAJOR FINANCIAL STATEMENTS YOUR FARM NEEDS TO KNOW

The financial position and performance of a farm business can be summarized by four important financial statements. The major statements and their purposes are as follows:

  • Net Worth Statement(also known as Balance Sheet) —summarizes the property and financial assets owned, the debts owed, and the net worth of the farm business at a point in time.
  • Net Income Statement(also known as Profit and Loss Statement) — summarizes the income generated, the expenses incurred, and the net income earned by the farm business during a period of time.
  • Statement of Cash Flows(also known as Cash Flow Projections) — summarizes all the sources and uses of cash by the business during a period of time.

Statement of Owner Equity — shows how net worth changed from the beginning to the end of the year.
While managing farm finances is no easy task, knowing these four financial statements will provide a better picture on the overall health and stability of your farm business.