Why Good Farm Records Matter

Better management skills will come in handy when financial stress hits the farm

Can you put together a cash flow statement? Should you lease your next combine? Do you know the best financial ratios to measure farm performance? Are you and your lender on the same page?

Those were just some of the questions that really didn't matter much when corn was surging past $6 per bu. But they should mean quite a lot more to the health of your business if we settle into long-term lower prices through the next few years, as many economists predict.

Farmers seem more interested in improving these skills as grain prices fall. And yes, that's a good thing.

Here are a couple money tips we learned at a recent financial workshop we held in St. Louis.

Cash flow is the most important piece of any financial statement. So says Lance Fulton, Chief Accounting Officer at Foreland Ag, Sublette, Kan. "It's designed to tell you how you used your cash. You generate cash from operations, then use it to pay down debt, buy stuff or fund personal things. Those questions get answered in a cash flow statement."

Farms with multiple enterprises need to figure out how to transfer costs to inventory. Stephen Severe, CFO at Padlock Ranch, Ranchester, WY, has been working on that process for over 10 years now. He manages the numbers for the ranch's seven cow/calf herds, two development replacement herds, backgrounding feedlot, 19 crops, a guest lodge, overhead costs and "non-operating" costs. Severe produces enterprises reports that contain annual income statements, interim income statements, and ad hoc reports to match changes. "That's how I determine costs that I transfer from, say, hay production, to feed costs," he says. "In the annual income statement it contains cost and production numbers, and shows transfer costs to inventory."

If you want to benchmark your farm's financial performance, first look to compare today's key ratios to your farm's history. Severe focuses on Return on Assets, Return on Earnings and Debt to Equity, to name a few. "We use a scorecard, which is put together by the board of directors, family and management," he says. "Then we track those goals that are listed and record the results. That ends up as our management report card for the year."

Working capital is critical when commodity prices and input costs experience significant volatility. Lenders prefer a Current Ratio (Current Assets/Current Liabilities) of at or above 1.20X. How can you improve working capital? Set aside cash for a rainy day; Protect the value of current assets through risk mitigation; Invest in current assets; Convert non-current assets into current assets; Restructure current debt to non-current; and don’t pay non-current debt early.

Falling land values make for anxious lenders. They may love and admire you, but they also have regulators they must answer to. "Bankers get really nervous when the collateral backstopping your loan gets less valuable than what you're borrowing from them," says Eric Edwards, senior vice president at NBH Agribusiness Banking Group, Denver, Colo. "The best way to make your banker love you is to tell them when you're making decisions and why, and they'll find ways to support you over time."

Get the full tip sheet on p. 38 of our April issue.

There's a number of ways to start building your business and financial skills. Try hiring a consultant or accountant; in some states, work with extension. Some states have management associations you can enroll in. If you're investing in financial software, make sure you also get the support service to make sure it's doing what you need it to do.

Once you're up to speed with your books, statements and skills, you will be more confident if stressful times hit the farm.

Follow me on twitter @mwilson1977

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