Finances are Vital to Your Ag Operation

Financial Management in Your Ag Operation Can Prepare You for What’s Next

Managing the finances of your agricultural business is just as important as how you handle the nuts and bolts of operating it. While there are plenty of uncertainties you can’t control, like inflation or weather, focusing on financial management can help you understand:

• What areas of your business are truly profitable
• If you’re increasing the net worth of your business
• Project cash flow and profit across the business in three years, five years, or longer

Understanding Your Finances

Future financial predictability begins with understanding the basics of your farm’s finances, including:

• Financial statements: Show the cost of production and any profit margins across the business.
• Income statements: Help you understand which areas of the farm are profitable and where you need to cut corners to improve. 
• Balance sheets: Give visibility into the business’ net worth over time. Is profitability increasing?
• Monthly or quarterly cash flow statements: Used to determine if you’re spending money wisely. Where are your expenditures? Are they decreasing or (predictably) increasing?
• Net worth statements: Summarize income versus expenses and the real cash you earned over time.

What Financial Metrics or KPIs Should You Monitor?

Key performance indicators (KPIs) are the backbone of business predictability.

• Are you trying to improve your business profit by a specific percentage point each year? 
• Are you trying to increase cash flow to prep for retirement and a successful transition?
• Are you trying to expand without taking on more debt?

KPIs can help measure your progress toward these and other business goals. KPIs help you make decisions based on facts and not instinct. While there are elements of art and science in agribusiness, KPIs are the science that keeps your business running.

You can track all kinds of metrics in a farming operation, but there are three critical KPIs to consider over time:

• Profitability: What operational factors can (and should) change to increase profit?
• Size: Is the business big enough to weather market shifts while generating an acceptable income level?
• Growth: Are you meeting your need to expand, and is this growth achievable and sustainable?

Profitability

Three financial measures usually fall under the profitability KPI: return on assets, equity, and operating profit margin. These metrics gauge the relationship between your farm’s output or net operating income and inputs such as asset turnover ratios or debt loads.

Size

Size and profit are two sides of the same coin. The question is whether sales volume is enough to generate profit for the long haul. Is the profit enough to meet your needs? How big does your business need to be to go beyond break even? This KPI also goes to the heart of the scalability of an agricultural operation. It is almost certain that your income needs will increase in correlation with inflation and the cost of doing business. It stands to reason that farm earnings should also increase to maintain profit margins.

Growth

The growth KPI centers around your farm’s potential. It should help answer questions such as: How quickly should I grow, and how can I finance that growth? Within this KPI lie calculations that track farming income generation and your ability to retain that income and reinvest it in the business.

Better Financial Management Can Help You Handle Future Risks

Establishing enhanced financial management and analytical oversight of the financial aspect of your agribusiness helps you optimize operations and prepare for what comes next. For example, when you develop cash flow projections based on predicted income and expenses, you can identify when costs would exceed your income.

This financial oversight ultimately helps with farm profitability, which is essential to the survival of your business. Regular equity and asset returns analysis against net farm income can help determine if your agribusiness is in trouble or going through short-term cash flow issues.

For example, a dairy farmer may sell livestock to improve cash flow in the short term. The long-term result is a reduction in milk production the following year, which impacts cash flow. Financial management can predict these dips and help you prepare for them. Analyzing the complexities of an agribusiness during uncertain times requires long-range cause-and-effect financial management and oversight.

Outsourcing Financial Management

Although there are many uncertainties that are out of your control, focusing on financial management can help you understand what areas of your business are profitable, if you’re increasing the net worth of your business, and project future cash flow.

Outsourcing your accounting functions is an option that farming operators increasingly turn to as the business of running their farm grows more complex.

Outsourcing your accounting practices can:

• Give you the information to make more data-driven decisions
• Help you understand impediments to business profits
• Offer roadmaps to withstand future challenges to your financial solvency
• Free you up to focus on building your operation

Eide Bailly’s Agribusiness Finance Solutions team is the trusted outsourcing partner of small to large farm operators nationwide and one of the few accounting firms specializing in this area. Our experienced agribusiness team can help you manage your accounting and financial processes to help you plan for a more profitable farm operation that can withstand future storms.