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Top financial tools for farmers

January is a great time to review the financial tools that help you make the best decisions

For many of us, the new year is a time of reflection. It’s an opportunity to take stock of where you’ve been, where you are, and where you’re going, both personally and professionally.

This is certainly important for farmers, as January is a good month for a detailed review of the administrative side of the operation — from the business plan to the budget — and to determine what you want to accomplish, and how.

But what are some of the most important financial tools that we should be using as we prepare for the year ahead?

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Young farmer standing in wheat field with hands on hips and looking forward at sunset

While they may not be new, the following tools remain relevant to a farm operation’s success.

Start with a plan

A good place to start is with your written business plan. Contrary to what some may think, this isn’t something that you write at the outset of your venture and then file away. If your business plan is something that has been gathering dust in your drawer, or hasn’t been looked at in more than a year, chances are it will need tweaking or even an overhaul.

Now is the time to revisit your strategy and vision for your operation, and to ask yourself the following questions:

  • Does my plan still reflect my goals for the farm or agribusiness?
  • Has my vision for the business changed?
  • What does the financial forecast look like for the coming year?

The business plan serves as your roadmap and is an important document not only for you, but also for any potential investors, banks or financial institutions, whether you’re a startup farm or if you have been in business for years and you’re looking to grow.

Good quality accrued financial statements

While cash accounting is a simple way to maintain records, it does not provide management with the information necessary to measure profitability and make solid management decisions.

Instead, you want a financial dashboard that can be used to benchmark and monitor farm performance and that is based on good quality accrued financial statements.

This is the only true report on how your operation is doing financially.

There’s a misconception that this statement is only required for the bank’s annual review process.

First and foremost, farmers should use accrued financial statements for their own purposes. Farm financial measures can be used to track liquidity, solvency, profitability, repayment capacity and financial efficiency.

With good information, financial ratios can also be useful in making decisions on business expansion or contraction, and to judge the financial success of the business.

Depending on the objectives you want to achieve (taken from your business plan), you’ll also be able to determine which key financial ratios to track, and which to monitor in order to evaluate your progress from year to year.

Cost of production

All farmers need to know how much it costs to produce that pound of beef or bushel of wheat. It’s the only way you will know the market price you need to achieve to cover your costs and generate a profit. Once you’ve determined your cost, you can analyze the expenses or costs that contribute to your cost of production and identify which activities have the greatest impact.

Now is a good time to review all the factors that go into your cost of production, from salaries and machinery to feed or new technologies, and look for ways to adjust your costs to increase efficiency and improve profitability.

Knowing your cost of production is also a key component of effective marketing and risk management plans.

Risk Assessment

Identify what risks your operation faces, evaluate those risks, and determine strategies to manage them.

There are many types of risk in agriculture, but generally they fall under the categories of business, financial and strategic risks.

Production, commodity prices, input costs, environmental regulations, changing technology, managing family or non-family labour, leverage, interest rate fluctuations, foreign exchange fluctuations, working capital, and trade are all risks that may or may not be present in your operation.

Once you have analyzed your risk exposure, you will be in a position to consider the best strategy for managing each risk. A good understanding of your risks makes you more likely to base your decisions on fact or analysis rather than emotion or instinct.

This is especially important now since prices and the climate may be more volatile, and operations are bigger.

Budget

Finally, the budget is a shorter-term plan that will give you a picture of the financial health of your farm. A key to success is to plan projections for the year ahead and track actual results aginst projections on a regular basis.

When something is off, you’ll know why right away. Now is the time to review the budget and get comfortable with the numbers, before you get busy planting and working in the fields.

Other tools farmers can use involve relationships and people resources. Depending on the operation, some rely on a business advisory board or committee of individuals whose business acumen and views they value and trust.

Also becoming quite popular is the peer group. This could be a number of farmers from your geographical region — or even across the country — that are in the same commodities. This approach has been very effective for some farmers to benchmark themselves relative to their peers, and to help them identify areas of strengths or weakness.

Finally, your banker is a good resource for providing insight into the business from a balance sheet and income point of view, and what kind of management criteria they are looking for.

Gwen Paddock, senior director, agriculture at RBC is a specialist in agribusiness. Since earning her B.Sc. with a major in agriculture economics she has been working with agriculture clients. A farmer at heart, Paddock was raised on a beef cow-calf farm outside Guelph, Ont., and participated in 4-H and Junior Farmers.

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