Farming in a volatile environment can feel like trying to ski down an avalanche. Staying ahead of the turbulence caused by the confluence of global economics, crazy commodity prices and unpredictable costs takes both day-to-day management attention and an eye towards long-term performance. Fortunately, there are tools to help you analyze trends and plot strategies.
Start by making sure you have an accurate assessment of your financial performance. Job one is figuring accrual adjustments to cash income statements filed for tax purposes – the ubiquitous "Schedule F." Less than one in four Farm Futures readers keeps this separate set of records that experts say is a prerequisite for knowing your business' true bottom line. Once this income statement is complete you can calculate key ratios of efficiency and profitability with your balance sheet of assets and liabilities.
For planning purposes, sensitivity analysis can help you determine the impact of risks faced by your farm. What happens if land prices fall, crop prices collapse or interest rates soar?
Finally, benchmark your farm's performance, not for bragging rights, but to compare your results to similar operations as you search for your farm's strengths and weaknesses.
For a series of Excel "Worksheets for Measuring & Analyzing Farm Financial Performance" developed by Purdue ag economist Freddie Barnard, download www.agecon.purdue.edu/files/ec712.xlsx.
The Center for Farm Financial Management at the University of Minnesota has a wealth of resources. This includes the FINPACK financial planning and analysis program, which is used by many lenders as well as farmers. The FINBIN farm financial database lets you compare your operation to thousands around the country. Go to www.cffm.umn.edu/ for more information.
The Farm Financial Standards Council has developed a series of ratios that are widely accepted in the industry. To learn more about these standards, go to www.ffsc.org/.