Most farm leaders know and understand that it’s important to maintain detailed, up-to-date farm books for things like taxes and line of credit purposes at the bank. But there’s more that the farm’s books can do for you as you’re making decisions for your farm business – much more.
Farmers have always been curious to know how their operation stacks up against other farms. But each farming operation is very unique. Think about the different geographies that farms are in, the different weather they get, soil types, typical yields, available talent pools, processes for putting the crop in the ground. There can be so much variability from operation to operation.
Ultimately, the best litmus test is to benchmark your operation against your own operation – looking at how you’re doing now compared to the past. That information can be gleaned from your farm’s books, but only when the right processes and reports are in place.
The cash method of accounting alone isn’t going to show you this type of information. Why? Cash accounting doesn’t show your operation’s profitability. It just shows you how your farm’s taxes ended up that calendar year.
What it doesn’t show you is potentially the most helpful insight: How decisions you’ve made impacted whether your operation was profitable or not. And, taking it a step further – away from historical trends and toward accrual forward-looking projections: How the decisions you make today impact whether your operation will be profitable or not in the future.
To run your farm as a business, you need data beyond what’s found on your farm’s tax returns. With better data, you can start benchmarking against your own operation and make decisions to help you move toward your future goals.
The right stuff
First, you need to be getting the right reports from your books. You’ll want to gain an understanding of where each expense truly belongs – to which crop and which crop year. You need to be using reports that show your costs from an accrual perspective – per crop type, per crop year – that include everything going into that particular crop.
Then, work with your financial advisors to analyze the information. Where are the weak spots? Identify the top 5 to 10 things that tend to negatively impact your farm’s profitability. Once you’ve developed a list, set some priorities. Choose to work on a couple items each year – make sure you select factors that are within your control.
This is all about getting more insight into your own operation – insight you can use every day. Make sure you have the right business systems and processes set up to be able to get this information – or start working with an advisor to get them in place.
On a scale of 0 to 10, how would you evaluate your current practices around using data for financial farm decisions? Here are a few questions for reflection:
1. Am I currently benchmarking my operation against itself?
2. Do I have the right data to be able to do that?
3. Am I looking at my operation honestly as I identify weak spots?
4. Are there some things that I just don’t do quite as well in my operation?
5. Who can help me with those areas – who has the knowledge and expertise? Me? Someone else? Someone I can hire or employ to leverage their strengths?
Read the new issue of the Smart Series publication, bringing business ideas for today’s farm leader. This issue features the story of a farm family who is working on a legacy plan to keep the farm in the family while maintaining family harmony, items to consider as you select an estate planning attorney for your legacy plan, and how to work toward increasing your operation’s efficiency. Get your free online issue here.
The opinions of the author are not necessarily those of Farm Futures or Penton Agriculture.