Many farmers have likely been taking a closer look at and using a sharper pencil with their financial information over the course of the pandemic. To focus in on what kinds of analysis can be most insightful, the panelists of the September 1 Hoard’s Dairyman DairyLivestream laid out suggestions for a game plan.
Pull it all together
“If you’re just starting, pull your records together so that you have a beginning and ending balance sheet for the year and an accrual-adjusted income statement,” began Chris Wolf, agricultural economist at Cornell University. The accrual adjustment is important to account for such changes as the assets on hand and prepaid expenses, he described.
From those numbers, profitability, liquidity, and solvency can be evaluated.
Net farm income per cow is an obvious way to assess profitability. Wolf also identified rate of return on assets (ROA) as an essential measure of how efficiently the farm is using assets to generate profits.
In order to gauge liquidity, Wolf and colleague Andy Novakovic emphasized maintaining working capital. Current ratio (current assets divided by current liabilities) is also a measure of liquidity. Solvency consists of calculating the equity-to-asset ratio and its inverse, debt-to-asset ratio.
Crunch the data
To understand the value of your numbers, then, requires comparison with benchmarks. But remember to make the right comparisons, said the University of Wisconsin-Madison’s Mark Stephenson. “If you’re doing benchmarking, make sure that you’re comparing yourself to your peers,” he emphasized. “You want to benchmark against farms that are reasonably of your size.”
Once those evaluations are done, decisions can be formed on what and how to improve. Set financial goals just as you would in other areas of the farm — realistically and incrementally. “Pick the big ones, pick some things that you can make progress at,” Stephenson advised. “Then, think about looking at this and measuring this over time to see if you’re making progress.”
Know what winning looks like
Another key to prevent drowning in the data is to know what you’re managing for. Novakovic pointed out that although profitability and liquidity may get confused with one another, they are two very different things.
Focus on the one that makes more sense for your operation at that point in time.
Recognizing that needs and market situations will change is vital, Novakovic added. “You have to play the long game; you can’t get too hung up on one year,” he cautioned. Evaluate financial trends over the course of three to five years and determine if you’re headed in the right direction. In those bad years, though, realizing what it takes to survive is the final tool in the toolbox. “To me, it’s knowing for sure what winning looks like, playing the long game, and making sure you can get through the bad year,” Novakovic summarized.
An ongoing series of events
DairyLivestream will air twice each month for the remainder of this year. The next broadcast will be on Wednesday, September 23 at 11 a.m. CST. Each episode is designed for panelists to answer over 30 minutes of audience questions. If you haven’t joined a DairyLivestream broadcast yet, register here. Registering once registers you for all future events.