Minding Ag's Business

Focus on Financial Management

Katie Micik Dehlinger
By  Katie Micik Dehlinger , Farm Business Editor
Experts say focusing on improving your financial management skills is a key piece of the puzzle when it comes to ensuring your operation not only survives this down cycles, but thrives. (DTN Illustration by Nick Scalise)

Over the past month, I've attended a number of agricultural conferences, and one theme connected all of them: savvy financial management is the key to not only making it through this down cycle in agriculture, but making sure your business thrives well into the future.

"Often times, your worst decisions are made in the best of times," said David Kohl, professor emeritus of agriculture economics at Virginia Tech University, at the National Ag Bankers Conference. He cited a case study of a farm that sold $8 corn in 2012, bought a substantial amount of land and changed its equipment buying habits. Now, years later, it's struggling with the long-term costs of those decisions.

The main takeaway from his numerous presentations was that farmers (and their bankers) need to assess their business IQ and determine a path to improvement. Good managers will outlive the complacent ones, and the best managers will find new opportunities to expand their revenue streams and grow their businesses.

Kohl isn't the only one focused on financial management. Michael Langemeier, from Purdue University's Center for Commercial Agriculture, also stressed the importance of assessing farm management skills in a recent FarmDoc post.

"Assessing management skills is an important part of benchmarking farm performance and figuring out where improvements may be needed. If the operators on the farm identify management areas which are not currently being addressed, they will need to determine whether someone is going to get up to speed with regard to these areas or outside help is going to be sought to address weaknesses," he wrote.

"Utilizing key performance indicators is an important ingredient in creating an environment that stresses continuous improvement. The right set of key performance indicators help a farm evaluate performance and highlight areas that need more attention. Key financial performance indicators include the current ratio, the debt to asset ratio, the operating profit margin ratio, the asset turnover ratio, and the replacement margin.

Langemeier's post includes a checklist you can use to evaluate where your farm stands and areas where you need to improve. You can find it here: https://farmdocdaily.illinois.edu/…

The same theme of financial management rang throughout the annual DTN Ag Summit, where breakout sessions focused on many of the components that goes into successful farm management: grain marketing, human resources strategies, tax planning, accounting methods and how to prepare for expansion.

While a lot of farmers are focused on staying in business, the best managers are thinking ahead, said Shawn Smeins, general manager and senior vice president with Rabobank. Difficult financial times provide opportunities for well-positioned operations to expand, but it's important that the decision aligns with the farm's long-term goals and isn't driven by ego or desire to expand for expansion's sake.

Farm operations looking to expand in these tough times need to effectively manage their liquidity, understand their current performance metrics, have an effective support system and know their local economics, especially when it comes to the turnover in land. Farmers need to be prepared to be prepared to act quickly, whether that means saying yes or no to a potential opportunity. Smein's presentation slides, which also provide some guidelines on what your financials should look like post expansion, can be found here: http://www2.dtn.com/…

Another theme I've heard repeated over the past month is to focus on what you can control. While the weather, commodity prices and politics of trade will play a role in most farms' financial bottom line, an effective marketing plan, tax strategy and other financial management decisions can help make the most of the cards you're dealt.

The end of the year is always a good time for reflection. If you spend some time assessing (or reassessing) your strengths and weaknesses, you can uncover actionable insights to help your operation becomes closer to achieving its goals.

(KD)

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