Keys to Success -- We Can Only Manage What We Can Measure
In today’s farming economy, it is important to understand your operation by the numbers. Managing your operation by the numbers will help take the guesswork out of decision making. Farming is a very complicated business and is constantly evolving. It is important to have a plan each year. You will inevitably need to adjust throughout the year, but understanding how you expect your farming operation to perform each year, will help take the emotion out of your decision making.
Cash Flow Statements: What are they and why do I need to complete one?
Completing a cash flow projection annually can help you better understand your operation’s cash flow demands. It also provides a clear picture of the funds coming in and going out of your farming operation on a monthly, quarterly, and annual basis. You’ll need to evaluate cash flow and profitability separately. An operation needs both to survive and thrive from one generation to the next.
In creating a cash flow projection, you will estimate when cash expenses need to be paid and when cash income will come in on a month-to-month basis. The cash flow projection will help you anticipate in which months your cash inflow might not meet your outflow needs. Most importantly, you will be able to plan ahead to cover cash shortfalls. You can find a cash flow template here.
Create cash flow projections in the fall as you enter the next calendar year, so you have a cash flow plan and know your funding demands for your operation for the upcoming year. Update your cash flow projection monthly as your projected numbers become final and as your cash flow demands change. For example, perhaps you sold corn sooner or later than you expected or you took advantage of some unplanned pricing discounts for pre-pays in the fall.
Understanding your operation’s cash flow leads to a more stable business model. It can help you make decisions on when to sell grain, if and when you want to expand your operation, hiring more labor or making equipment purchases. It also helps to keep your interest expense down by better managing the funds you borrow on a month-to-month basis.
Cost of Production: You might be surprised to know …
How do you know you are making the right marketing, input-buying decisions and operating at a profitable level? The first step is to calculate your cost of production. Knowing your cost of production can help in making key management decisions. It can also keep your operation profitable year after year. Be sure you know your production and input costs on a per bushel basis. There is no riskier business than farming, and it’s a gamble once the first kernel of corn goes into the ground. What are the best- and worst-case scenarios for you farming operation? Generally, you will want to calculate your break-evens with 10-year historical APH yields and then a worst-case scenario.
Be sure to include family living costs minus any non-farm income, all equipment and real estate loan payments and extra interest expenses. Include all other input costs such as seed, fertilizer and chemicals in your break-even calculations. Knowing your costs helps you to make marketing decisions and takes the guesswork out of selling your grain. Our Margin Manager tool helps to calculate costs for your operation. Once you know your break-even costs, the next step is to have a marketing plan.
Marketing Plans: Why is it important to have a marketing plan?
“Analysis paralysis” is a term I hear sometimes. It’s the concept when you’ve analyzed a situation so much that you get stuck and can’t decide on a course of action. When it comes to grain marketing, waiting and overanalyzing could cause you to miss out on a profitable opportunity.
As an analytical person, I am often guilty of experiencing analysis paralysis. With all the technology and information the ag industry has at their fingertips now between social media, market news, weather apps and local coffee shop chatter, it is easy to get lost in where we think corn is going to be or how acreage reports will affect the market. The best way to take the guess work out of marketing is to have a written plan! Plans can change, evolve and grow, but you need a starting point.
After you know your cost of production, develop a written marketing plan to keep your operation at a profitable level. Create a timeline for when you would like to have 25%, 50% and so forth of your grain sold. You will be amazed at how much easier it is to make decisions when the time comes because it is part of your marketing plan. Set a target price, and when it gets there pull the trigger. Unfortunately, too many of us get to that target price and then hope for another $.10 or $.20. Before we know it, the market swings the other way and we end up below our target price. Make sure you are also considering your cost to carry grain (interest expense and storage) into summer months when making marketing decisions.