BROOKINGS, S.D. - Surviving versus thriving in the midst of market lows depends on management decisions.
"Good producers manage production to the best of their ability; top producers manage the financial components of their business in the same manner," said Heather Gessner, SDSU Extension Livestock Business Management Field Specialist.
Below Gessner outlines some management practices agriculture producers should implement"
* Annually create a balance sheet, projected cash flow statement and profit loss (income) statement
* Be as familiar with the financial standing of the farm or ranch - gross farm income, working capital and return on assets - as most farmers are familiar with crop yields or weaning weights.
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If a producer is not currently creating the financial information for their operation Gessner asks, "Who is?"
"If the banker or accountant creates these documents for a producer, they are likely to have a better understanding of the financial situation of the operation than the producer themselves," Gessner said. "If someone else is creating and maintaining an operation's financial statements, as the owner/operator, agriculture producers need to have a clear understanding."
Become the manager
The start of a new year, Gessner said, is a great time to commit to becoming better at managing your business. She suggested starting off by creating financial statements.
Balance Sheets: Take an accurate inventory of everything on your farm. Count the number of head in each pen and record them by sex, weight, age or other identifiers that can be used to place a value on them. Also, take inventory of grain and other feedstuff on hand.
For example, a cattle producer would create a list similar to the one below:
- Raised replacement heifers, 700 pounds
- Purchased aged bulls, 1900 pounds
- Raised 3 to 8 year old cows, 1400 pounds
- Purchased feeder steers, 500 pounds
Grain and feedstuff examples:
- Raised corn, kept for feed
- Corn, contracted for March delivery
- Raised corn stalk large round bales, 1200 pounds each
- Raised Alfalfa big square bales, 1700 pounds each
- Purchased grass hay, large round bales, 1500 pounds each
- Purchased mineral blocks, 50 pounds each
The inventory list makes up the asset side of the balance sheet. The liabilities side includes all the loans, account payable balances, and other money due to creditors.
"These balance sheet numbers are then used to formulate many of the financial ratios," Gessner said. "The ratios can provide trend analysis of your operation. The trends can then be monitored to ensure the operation is thriving or provide feedback for areas of change."
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Projected cash flow: The creation of projected cash flow statements serves as a planning tool.
"By creating a month-by-month cash flow, producers have an enhanced understanding of how much money is required to cover costs, and when it is needed" Gessner said.
Cash flow statements can be used to do everything from making marketing decisions to maximize price and refinance decisions that change the due date of loans to coincide with the marketing plan to provide a budget for the business as well as the family.
Profit and Loss Statement: The profit and loss statement ties together actions the operation made, not listed on other financial statements.
"The lack of redundancy is one of the beauties of the statements," Gessner said.
The profit and loss statement reports the earnings of the operation through mathematical addition and subtraction of income and expense from the gross income.
Examples of items listed on a profit and loss statement include:
- Capital gain/loss
- Depreciation expense
- Non-farm income received
- Family living expenses
SDSU Extension Provides Helpful Resources
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Financial statements provide the numbers required to create the financial ratios for the operation. The ratios can then be monitored for changes in trends.
SDSU Extension's Financial Performance Measures Workbook helps agriculture producers easily create the ratios, which includes graphs for some of the most commonly used ratios.
This workbook can be found http://www.sdstate.edu/economics/extension-and-outreach.
"Opportunities will present themselves in the next couple of years for top producers to expand their operation or make improvements," Gessner said. "Those individuals that take the management side of their operation as seriously as they take the production side will not only survive low market prices, but may even thrive."
For more information and guidance, contact Gessner or another SDSU Extension Livestock or Crops Business Management Field Specialist. Visit iGrow.org for a complete staff listing.
