January is behind us, hopefully taking the bitter cold with it. One thing will not move out with the running of the calendar is the need for producers to become better farm managers. The low market price trend is expected to last through 2017, into 2018. Managers will survive, and maybe thrive, based on the decisions and actions they make. Those viewing themselves as “just farmers” may not.
Who manages your business?
Good producers manage the production to the best of their ability; however, top producers manage the financial components of their business in the same manner.
Top producers can answer yes to the following questions:
- Do you create your own yearly balance sheet, projected cash flow statement and profit loss (income) statement?
- Can you answer questions related to gross farm income, working capital and return on assets, as easily as you discuss corn yields or weaning weights?
If you are not currently the one creating the financial information for your operation, who is? If the banker or accountant creates these documents for you they are likely to have a better understanding of the financial situation your operation is in, and thus they become the manager.
Become the manager.
The start of a new year is a great time to commit to becoming better at managing your business. Start by creating your financial statements.
Take an accurate inventory of everything on your farm. Count the number of head in each pen and record them by sex, weight, age or other identifiers that can be used to place a value on them. Also, take inventory of grain and other feedstuff on hand.
- Raised replacement heifers, 700 pounds
- Purchased aged bulls, 1900 pounds
- Raised 3 to 8 year old cows, 1400 pounds
- Purchased feeder steers, 500 pounds
Grain and feedstuff examples:
- Raised corn, kept for feed
- Corn, contracted for March delivery
- Raised corn stalk large round bales, 1200# each
- Raised Alfalfa big square bales, 1700# each
- Purchased grass hay, large round bales, 1500# each
- Purchased mineral blocks, 50# each
The inventory list makes up the asset side of the balance sheet. The liabilities side includes all the loans, account payable balances, and other money due to creditors.
The balance sheet numbers are then used to formulate many of the financial ratios. The ratios can provide trend analysis of your operation. The trends can then be monitored to ensure the operation is thriving or provide feedback for areas of change.
Projected cash flow
- The creation of projected cash flow statements serves as a planning tool. By creating a month-by-month cash flow, producers have an enhanced understanding of when and how much money is required to cover costs. This knowledge can be used in a variety of ways. Examples include:
- Making marketing decisions to maximize price, instead of selling when cash is needed.
- Refinance decisions that change the due date of loans so they coincide with the marketing plan versus a month that has little or no expected income.
- Provides a budget for the business as well as the family.
Profit and Loss Statement
The profit and loss statement ties together actions the operation made, not listed on other financial statements. The lack of redundancy is one of the beauties of the statements. The profit and loss statement reports the earnings of the operation through mathematical addition and subtraction of income and expense from the gross income. Examples of items listed include:
- Capital gain/loss
- Depreciation expense
- Non-farm income received
- Family living expenses
Financial statements provide the numbers required to create the financial ratios for the operation. The ratios can then be monitored for changes in trends.
SDSU Extension has created Financial Performance Measures Workbook to ease the creation of the ratios, which includes graphs for some of the most commonly used ratios. Through the graphs, producers can visually see the movement of the ratios over time.
The spreadsheet is a companion piece to Financial Measures for South Dakota Farms, which explains what each of the ratios mean.
Opportunities will present themselves in the next couple of years for top producers to expand their operation or make improvements. Those individuals that take the management side of their operation as seriously as they take the production side will not only survive low market prices, but may even thrive.
For additional assistance, contact an SDSU Extension farm business management field specialist.