| ||“Financial record keeping is the part of farming that is rarely discussed or high on a farmer’s priority list,” says Dean Dyck, farm business management specialist, Alberta Ag-Info Centre Stettler. “It often takes a back seat to growing crops, fixing machinery or managing livestock until a banker or accountant schedules an appointment to review the farm’s finances.”
In 1988, John E. Carlson published an article in The Journal of the American Society of Farm Managers and Rural Appraisers entitled Farmers’ Perceptions about the Management of their Farms. He found that farmers admit to the importance of good record keeping but rank it fourth behind field work, buying and selling machinery and crops, and working on farm machinery. Only sixteen percent hired outside help for record keeping, 50 per cent did it themselves and 20 per cent named their spouse as the primary record keeper. Although this survey was completed over 25 years ago, Dyck says the results may be similar today even if the advent of computers has eased the burden of record keeping.
“There are many reasons why farmers’ financial management skills and literacy have been slower to develop compared to other industries. Although financial institutions require up-to-date statements, many farmers’ primary reason for record keeping is for Canada Revenue Agency reporting. Since cash basis accounting provides farmers with significant advantages in managing their tax liabilities, there is little incentive for them to prepare accrual financial statements, a primary management tool in other industries.”
Nonetheless, because farming is a complex business, accurate records and careful financial management serve many purposes, says Dyck. “They can help increase profits by identifying profitable crop or livestock enterprises. They can help secure financing for the next production year and livestock/equipment/land purchases. And, they can indicate the overall health of the farm business and provide direction for future management decisions.”
Dyck says that a strong farm financial plan should answer three questions: Where am I? Where am I going? and, How do I get there? “There are two key financial statements that every farm should prepare to answer those questions: a balance sheet and a cash flow. A balance sheet will give you the power to manage working capital and debt repayment capacity. Projecting a cash flow budget for 2016 is essential, particularly if you sold off livestock in 2015, lost part of your land base in a rental competition or paid too much to win that land rental competition. This budget will keep you focused on variable expenses (seed, fertilizer, chemical or feed) as well as fixed costs.”
“These statements will give you the power to manage risk. There is a lot of volatility in both grain and livestock markets and knowing your break even prices allows you to act when the market goes in your favour. Crop insurance is an important production risk management tool. A budget will allow you to compare your total production costs to your coverage levels and assess the exposure you face.”
Profitability in agriculture is cyclical by nature, adds Dyck. “Taking the time to focus on your farm’s financial picture will ensure that you can prosper and take advantage of profitable times in the future. If you have any questions on farm financial planning, give us a call at the Ag Info Centre at 310-FARM (3276).”