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Resolutions for your Farm's Financials

Date: 
Author: 
Bob Augustin
Educational Opportunities: 
Articles
Interests: 
Grain, Young, Beginning Farmers
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Many operators have made tremendous progress in using technology and precision to boost their yield or cut input costs. Many farm operations have grown in size over the past 10 years. However, I wonder if those same operations have made a similar level of growth and improvement in their financial management and records.   Just working harder, or operating more acres doesn’t guarantee more profit. Commodity prices have dropped in recent years, resulting in reduced profit margins and for some, negative earnings. Does your operation have the financial information necessary to be successful in these challenging times? Are you able to answer questions such as these?
  • How do you know if you were profitable in 2017? Your checking account balance is down, but you have an income tax liability.
  • Do you need to make changes to your business to reduce losses which eat up equity? Can you turn a negative enterprise into a profit center?
  • Can you move forward with a planned expansion or major capital purchase? What will it do to your financial position?
  • Does your farm unit support bringing a daughter or son into the business? 
  • Can you show your lender that approving your operating loan for next year is an easy, positive decision?
  • What is your earnings breakeven, or what price do you need for your grain sales to cash flow expenses and debt service? What is available for your family to live on?
  • How do you compare to your peers? Can you compete with them in the future?

Strong financial management is based on accurate, easily analyzed financial information.  What do strong financial records and information look like?

Top level management reporting includes:
  • A fiscal year-end balance sheet with supporting schedules: the foundation of your annual analysis.
  • Accrual Income statement: ties the cash income and expense information to the balance sheet changes to calculate a true earnings number for the operation.
  • Reconciliation of Owner Equity Change to the Accrual Income Statement: accounts for depreciation of assets, and weeds out revaluation to give true earnings.  When reconciled it gives confidence in the results.
  • Statement of Cash Flow: accounts for all dollars moving in and out of the unit, including asset purchases and sales, in addition to family living draw. 
  • Projected Cash Flow for the next year: necessary to determine operating loans, marketing decisions, and asset purchases. This cash flow projection allows you to plan ahead an cover any cash shortfalls withoug tapping credit cards, leaving bills unpaid, and possibly wrecking your credit score.
  • Enterprise Analysis:  based on yields, cost per bushel and cost per acre.  Knowing your break-even is necessary to decide on land rent or purchases, grain marketing, and input decisions.
  • Marketing Plan: best practice is to have it in writing to aide you in marketing and risk management decisions.

You might look at this list and feel overwhelmed.  Moving to a top level of financial information will take several years, so take the first step in the journey. Year end is a great time to make that move as the balance sheet is the base for all other reporting. You can build on that foundation going forward.

Balance Sheet Tips:
  • Complete it as of your business at year-end date.  Many operations defer income or prepay expenses at year-end.  To have a correct statement, the year-end transactions need to be placed in the correct year, to match the income statement.
  • Accurate inventories valued at current price, and payables list.
  • Details to include on the debt schedule: Interest rates, accrued interest due, and payment terms.
  • Correct balances of your checking account:  Outstanding checks can skew the results greatly.  Be sure to account for them. 
  • Be sure your asset list reflects the capital purchases and sales made during the year.
  • Proper handling of CCC grain loans: Remain consistent on treating them as income or loans.  Again beware of transactions occurring near year-end. 
  • In future years this report can be laid out side by side with historical statements for easy analysis of year over year change.

When you start with a well completed balance sheet, the next steps to accrual earnings and reconciling the two statements should flow well.  I urge you to take the time to complete the entire balance sheet intimely manner.  Then I encourage you to make this an annual year-end event.  By making these steps a priority you will be well on your way to better financial management.

Bob Augustin is a Senior Credit Officer at Compeer Financial. For more insights from Bob and the rest of the Compeer Credit Team, visit Compeer.com
 
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