Financial recordkeeping and management are often major stressors for farmowners and managers. Wrestling data and numbers into usable information can feel daunting, but it doesn’t have to. Starting small and following a road map from basic recordkeeping to advanced financial analysis can power profitability, planning and peace of mind.
Recordkeeping is the foundation of good financial management. You can think of it like the soil in your fields. If the soil is weak, rocky or poorly managed, you can’t produce a strong crop no matter how good the inputs or equipment. Accurate records form healthy financial soils which allow deep roots for strong analysis, decision-making and profits to weather any storm our farms might experience. The farm financial management model helps visualize this process (Figure 1).
Step 1: Goals
The road map for improving financial management helps farmers move from creating basic records to building reports to running financial analysis and then onto making decisions with the insights you gain. Following this road map allows you to connect goals like expansion, succession, profitability and risk management with the right financial tools to improve your chances of success. It helps you figure out how you can plan for a major change, add technology or equipment to the business, identify areas for improvement and determine long-term viability and strategic direction.
Step 2: Recordkeeping
With your goal in mind, start with mastering the foundation of recordkeeping. Accurate records are essential for financial clarity and support accounting and profitability analysis. Required components of recordkeeping include tracking how you make and spend money for the business and the household, having a complete inventory list, collecting and organizing your records, selecting a recordkeeping system and keeping it up to date.
Step 3: Reports
From there, we can transition onto the next step of creating and using reports for better decisions. In this step, you want to know how cash flows in and out of your business over the last year and over the next year. You also want to create or collect three to five years of balance sheet statements, tax returns and accrual income statements. Having three to five years of data helps you understand and examine trends and reduces the impact of just looking at one year which may be unusually good or poor. With management reports in hand, the next steps are analysis and decision-making.
Step 4: Decision-making
Reports are not the finish line. They show you what has happened but not what to do next. Analysis turns the data and numbers into insights and choices for the future. In this step, you identify historical trends; compare benchmarks; make a plan for upgrading and maintaining land, buildings and equipment; run what-if scenarios; and create projections for the coming years.
You want to understand what is driving profit by using enterprise analysis to see which parts of the business make or lose money. Part of this is identifying high-performing or underperforming components like markets, products or entire enterprises, and part is evaluating your efficiencies like asset turnover, expense ratios and costs of production to see if resources are being used wisely.
Run “what-if” tests, also known as sensitivity analyses, to test what would happen if prices, costs, interest rates, etc., drop or rise. Testing different scenarios prepares the business for volatility caused by issues such as market fluctuations, extreme weather, government policies and changes in consumer sentiment.
Review risk exposure and check resiliency in key areas such as production, finance, marketing, legal, human and technology. Pull all the insights gained from this analysis together to make decisions that align with your goals.
This is the stage where you are setting your future. You want to pull all your financial data together to build a forward-looking financial plan. Trend analysis, projections and sensitivity analysis test future decisions and help you decide whether to move forward by identifying your exposure to risk. This allows you to move from reactionary management to proactive preparedness.
Building your ability to create advanced financial analyses increases confidence in decision-making, helps reduce stress and strengthens support from family and business partners.
Step 5: Pull it all together
If you walked through the whole road map and realized that you have not even completed all the components of recordkeeping, that’s OK. That’s a great place to start. Prioritize your next steps by choosing just one to two pieces from that step to work on at a time before moving to the next.
Remember, accurate records are the building blocks for creating reports which allow you to complete financial analyses which, in turn, help you make confident decisions for the future of your farm. Strong foundations create strong decisions that support growth and adaptability.
Using this financial road map walks you through the steps of where you are now, where you are going and how to get there in this five-step process.
- Step 1. Identify goals
- Step 2. Create accurate records
- Step 3. Build reports
- Step 4. Use analysis tools
- Step 5. Prioritize next steps
You can tackle this one step at a time by starting small and building the habit as you progress. Once you build strong habits and financials, make sure to update, monitor and adjust regularly.
This article is provided for information purposes only. Readers should consult their own professional advisers for specific advice tailored to their needs. Information contained in this article may be subject to change without notice.
