Strong financial management on the farm doesn’t come from
one particular practice. It’s a combination of good habits that help you
interpret what the numbers in your operation are telling you.
And these practices should be geared toward helping you do
everything a little bit better on your farm. That’s what the most successful
farmers are doing today.
Ag economist and speaker David Kohl says that according to
studies done by ag universities, there’s about a 60 percent difference between
the financial information on your farm that gets reported for tax purposes and
what actually happened in your business that year.
It’s almost impossible to manage things well by merely
looking at your tax records from the previous year. Those records do not give
you a complete picture of what’s happening in your business.
You want the most accurate data possible to make business
decisions, so you need to be using accrual-based statements and analysis. Your
banker or financial consultant can help you put together an accrual statement
Using this in your decision-making is one of the best
financial practices you can put in place. This will put you ahead of the game
because you’ll be highly aware of what’s going on.
Another area to manage carefully is your working capital. A
healthy ratio of liquid assets in your operation is especially important when
opportunities come up — like the chance to buy a piece of land close to home
that you’ve always had your eye on or a good deal on a piece of equipment you
I’ve talked about how your farm’s financial metrics are like
the numbers that you get from your doctor when he runs tests to measure your
Knowing those numbers is how you find out what’s going on in
your body and what you can improve. In the same way, you can work with a
financial consultant to interpret your farm’s data and determine what you can do
Here are a few more ideas you may find helpful in building
good financial management practices in your operation. First, how are you
tracking your farm expenses?
Related to that, how are you tracking your family living
expenses? If your farm is incorporated, you already should be keeping these
accounts separated, since that’s the law for an incorporated business.
If your farm isn’t incorporated, it can be tempting to keep
everything in one pot since you aren’t required to separate it out. That might
make things easier in the short term for cash flow reasons.
However, in the long run it’s much more helpful to you to
keep it separated. Knowing exactly how much you are spending in different
categories is essential to making good financial management decisions on the
Next, take time to create expense categories that make sense
for your operation. Then you can track and see if you overspend in any
particular area. You can easily see the areas where you’re already doing a great
job of managing costs.
When your costs increase because fuel or seed prices jumped,
then your numbers will reflect that. If something else causes an increase,
you’ll be able to identify precisely what happened. Sometimes the numbers can be
Finally, it’s about having the right financial tools at your
disposal in order to evaluate how you’re spending money in your operation.
Seeing what you need to do to create positive changes can be very powerful and
Otherwise, it’s hard to figure out what happened. You might
feel like shrugging your shoulders and saying something like this, “Well, fuel
prices were out of hand this year,” or “Seed was just really expensive.” It’s
easier to create scapegoats when it’s not clear why expenses were higher.
Using budgets allows you to compare your plans with the
actual costs. You figure out where your money is going and you have the
opportunity to make different management decisions based on the numbers.
Success comes from tracking your expenses carefully. David
Kohl, who I mentioned earlier, recommends this to farmers as a tool that can
help when you’re working to manage your expenses.
At our Ag Edge Farm Business Seminars this winter, he’ll be
talking with farmers about what’s coming next economically in ag and how you can
best prepare for it.
Find a seminar near you and check out the agenda on our
website at www.waterstreet.org. You’ll gain valuable insights to take back to
your farm from speakers on a variety of farm business topics.