As we’re leading the farm and working toward our goals, it’s important to know whether we’re making progress toward those goals. We need a sense of where we’re headed and how we’re doing. Otherwise, it can be tough to know what we need to do.
Knowing our goals and how our operation is doing on them helps benchmark the farm against our own past efforts. With that in mind, I want to share three actions that may be especially helpful for farms moving through financial challenges the current ag economy is presenting. These are good financial management practices for any farm business.
Set the right targets
First, you need to get the right metrics set up for your farm. You need to be setting financial targets, but perhaps more importantly, they need to be the right things to measure in the first place. What matters most? Getting the type of data you can use to make more informed financial decisions.
The key is that most businesses, in general, are based on managing and making a margin. In farming, it’s all about how you manage your margins, so you need good metrics in place to help you best do that.
Here’s one metric that should be on every farm’s dashboard: working capital as a percentage of gross revenue (your current assets minus current liabilities, divided by gross revenue). You need to know whether your farm has a healthy percentage (we recommend at least 40%), and what you can do to improve a low number.
Better before bigger
Next, you need to focus on getting better at your business before you consider expanding it. When margins are good, it’s easy to start thinking we can focus on improving our business later – we need to grow right now because we’re losing out. But this mentality leads us to focus on competing against the neighbors versus doing what we need to do to improve our farm and make it the best it can be.
Even though ag is seeing lower margins right now, I think the best producers will still be able to manage their margins well. They will get lean and mean – they’ll get ‘better’ in every aspect of their business. The margins may not be the type that farms were used to for the past 10 to 12 years, but these farms will survive – and probably come out even better on the other side.
Focus on efficiency
That leads into my final thought: Prioritize becoming the lowest cost per unit producer. Find out how much it actually costs to produce your crop by looking at your bushels divided by your total cost.
In every decision you make for your farm, you need to consider whether that decision is going to move you closer to becoming the lowest cost per unit producer. This doesn’t necessarily mean buying the cheapest possible inputs. You can use the metrics you’ve set up to help make these decisions.
Farming can be a tough business, especially during an economic downturn for ag like the one we’re seeing now. It’s important to keep an eye on the big financial picture of your operation. Consider getting key metrics put in place if you haven’t already, and track them over time.
The farms that will not only survive this downturn, but thrive into the future are those working on ways to become more efficient. Work with advisors who can help you prioritize and get key financial targets and plans in place.
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.