Farm financial fitness for tomorrow
How much time do you spend exercising or trying to stay physically fit each month? Is your nutrition plan quality or quantity based? Your exercise and nutrition plan directly impacts your health, yet most of us wait until we have a problem before we take action. If you wait until you have a heart attack it might be too late to get your body back into peak physical condition. The length and quality of your life is directly impacted by your daily decisions. Your physical fitness is a direct result of what you put into it.
Your farm’s financial fitness is no different. How much time do you spend analyzing your financial performance and identifying your long-term trends? How much effort and detail do you put into purchasing and managing margins? If you wait until commodities or land values go out of whack, will you be able to maintain your financial fitness? Your financial fitness is a direct result of the time and energy that you put into it daily.
Bad decisions are usually made during good times, and good decisions are usually made during bad times. During good times we tend to lose our critical eye and the motivation to do the things necessary to maintain good financial fitness. When the margins are wide, the small improvements don’t seem as necessary as they do when the margins are tight. Consider within your farm business where you might be able to improve efficiency and overall profitability.
Focus on your financial fitness now, during the good times. This could be the healthiest thing you ever do for your farm operation. Consider this three-step approach to help your business stay focused on a healthy future.
Know Where You’ve Been. Look back at the history of your operation and dissect key farm failures and successes. For example, look at yield trends during the past 5 or more years. Review the highest yielding years and the lowest yielding years. What could have been done during the lower years to improve yield? Conversely, did anything specific lead to higher yields in the good years? With the same measure, examine overall profitability in the past. Look at the highs and the lows.
Work to understand why some years were more successful than other years. Are there specific enterprises in your operation that tend to be more profitable than others? Take the time and dig into the details. Some things are out of our control, such as the weather. Focus on what you can and care to control. From that make decisive changes when they’re needed. Be sure to conduct an in-depth evaluation of your previous decisions regarding marketing, production, risk management and overall equity earned.
Know Where You Are. Understand your cost of production. Don’t just calculate cost of production at the beginning of the year and consider that to be close enough. Production costs are a moving target, the same as yield and market prices. Make sure your cash flow projections are reviewed on a regular basis and updated. Livestock producers need to be completing this process quarterly.
Also, it’s critical that your balance sheet accurately reflect the current environment. Inflated asset values on your balance sheet could give your farm business a false sense of security.
Know Where You’re Going. This step involves asking yourself and farm management team additional questions. The answers should be based on your farm’s long-term goals and objectives. What tools are needed to help your farm achieve success? Who in the operation is responsible for specific goals and objectives? What challenges could prevent us from reaching our goals? By answering these questions you’ll be able to better develop and implement a successful plan for your farm’s future.
Looking back on the past gives us perspective, understanding the opportunities and risks of today gives us reality, and forecasting the future is entirely up to you and your farm business. Talk to your local Farm Business Management Instructor to get the help you need to stay successful now and in the coming future.