As I've been sharing this series on financial basics, I started thinking about the last couple topics I've covered here – working capital and return on investment. What I've been talking about so far are broad-based financial concepts that you can apply to your operation as a whole to know how your farm is doing.
This week, I'm going to focus in the opposite direction, toward more detail. Knowing how your farm's financials roll up to your farm's major measurements is important, but it's just as important to be able to break them down to the field or herd level. That shows you how each component is affecting your farm's finances.
Here are some questions we're hearing from farmers: How would it affect my operation if I let this piece of rented land go? What would happen if I started renting this new piece of land, at this level of cash rent? What if I expanded my cattle herd by this amount? What if I decide to sell off part of my herd?
Breaking it down
Answering these questions for your operation is a matter of having your financials available so you can get answers to these types of 'what-if' scenarios. You may want to have a financial consultant run these scenarios for you and have them help you interpret them.
Having the numbers helps you make informed, solid decisions about what to do. Without the data, it's tough to make a decision about something like letting a piece of rented land go. For most farmers, that would be an emotional decision. But with the numbers showing you the ultimate impact on your operation, that decision becomes a bit more straightforward.
For example, if the scenario showed you that letting that cash rented ground go would actually increase your costs across your operation to a point that didn't make sense, then the decision is a bit clearer. Or if you found out that it would be financially harmful to your operation to keep the land at the current level you were paying to rent it, then the tough choice to let it go may become a little easier.
Either way, knowing your operation's numbers at the component level – acres or livestock – can help as you make decisions. That gives you much more to rely on than a good guess or gut feeling about your decision.
Advancing your skills as a financial manager and using data and financial metrics to make management decisions is something that top farms are developing now in their operations.
Think about how your farm is currently using – or not using – financials to make decisions for your business. In what ways and areas is your operation already doing a good job of using the financials to manage? In what areas could your operation do a better job of using the financials – for better results?
The opinions of Darren Frye are not necessarily those of Farm Futures or the Penton Farm Progress Group.