Farm Horizons, November 2010
Do you manage your farm?
By Myron Oftedahl
Who manages your farm? Who makes the decisions? They sound like easy questions, but are they really?
Let’s start with the decisions. Do you look at all of the options available and then make your decision based on what information makes the most sense?
The decision cycle has five steps; 1) the discovery of a problem or need, 2) gathering information about what options are available to address the problem or need, 3) analyzing the options, 4) using the supporting data to choose the best option, 5) reviewing the decision to verify if it was correct, or did other needs show up?
So, using the information about the decision cycle, do you look for supporting information, or do you do the same thing as Dad or Grandpa used to do? Can you say, “no” to a salesperson? Have you ever bought something and later admitted to yourself that you really didn’t need it, or it was a poor choice?
We all make mistakes now and then, but admit it, move on, and learn from the experience. We use this decision cycle every day without thinking a lot about it, such as, how will I dress today? When we make decisions involving replacing a tractor or expanding the barn, we are more likely to formalize the decision cycle and write the options down and then carefully consider what to do.
Who manages your farm? Is it your crop consultant, your tax accountant, your fertilizer/chemical salesperson, the seed person, or the vet?
You need to remind yourself that you can take advice from all of these people, but in the end, it is your responsibility to make the decisions that impact the profitability of your farm.
Do you know what your direct input costs are? Do you know what your break-even costs are? A crop budget will identify what your input costs and break-even costs are for your operation.
You need to calculate them for your farm, not just use the average crop budget published in the paper or on a website. Do you know what the financial ratios are for your farm? Do you know the current ratio, debt to asset ratio, term debt coverage, and working capital? The farm business management program looks at 21 financial ratios for a farming operation.
Do you have a cash flow for your farming operation? An accurate cash flow will identify when you need cash to cover the farm expenses, show you when loan payments are due, and what are the projected income and expenses for the year are.
A cash flow can identify some of your financial risks. What can you do to manage the risk? Do you buy crop insurance or add storage capacity vs using contracts? Is your marketing plan sufficient? Once you have a cash flow, you need to monitor it. Did an unexpected repair happen? Did you have to do an additional herbicide application that you hadn’t planned? If these things happen, what impact will they have on the cash needs for the farm?
Do you have a plan for capital purchases? It is recommended to have a five-year plan for capital purchases. It is easier to control your spending if you are following a plan. Some of the livestock producers that I work with have a plan in which the manure spreader is replaced every three years. We can build this into the cash flow and avoid some of the surprises at the end of the year.
How often do you meet with your lender once a year when your operating line is due? No one likes surprises, your lender included. They are part of your operation, and it is your responsibility to keep them informed and to understand your operation.
If you need help with some of these questions, contact a farm management instructor, and they can assist you in getting some answers. Do you make the decisions? Do you manage your farm?