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Common Ground
Farm Credit Services of America Blog

Stand on Strong Financials

by Farm Journal, in partnership with FCSAmerica | Sep 06, 2016

strong financials_article_pageA farm is a business

Seth Millhorn, an Idaho farmer, understands that his farm is a business. But he says some beginning producers don’t look at their operations that way.

“The most common mistake I see new producers making is not realizing they are running a business first, and it happens to grow crops and sell them,” he said.

One of the biggest challenges Millhorn had to overcome when he began farming was pulling together his farm’s financials: “I had to come to terms with sitting at the desk and perfecting financial management instead of turning wrenches on equipment.”

Successful farmers are good at financial management

Farm operations are becoming more business-oriented. Today’s successful farmers are as good at financial management as they are at farming or ranching. They understand the importance of keeping good, accurate records and establishing a sound record-keeping system.

“Working harder physically may have worked for your grandparent’s generation,” said Erik Oberbroeckling, a young farmer in Garnavillo, Iowa. “While I do not disagree with hard work, the financial background also needs to have equal attention.”

Emily Oberbroeckling, who farms with her husband and his family, is an appraiser for Farm Credit Services of America (FCSAmerica). She said good records serve farmers well for several reasons:

  1. They help measure the progress of your career in agriculture.
  2. They provide year-over-year analyses that can point early to changes in financial health.
  3. They boost a lender’s confidence in your management skills.

“Have all of your financial ratios figured. This includes return on assets, debt to assets and current ratios,” Erik Oberbroeckling said. “Keep them up to date, annually at a minimum, and use them to compare where your operation was a year, two, or three years ago.  Are they improving? Have there been any drastic changes? If so, why? Did you make a farm purchase, a big family living draw?”

Use a cash flow and budget

Emily Oberbroeckling advised having a cash flow and budget ready to present to a lender.

“Treat your business like a business,” she said. “Budget your family living expenses and stick to it. If you had an off-farm job, you would know your salary upfront and would have to live within it. You wouldn’t be able to get a bigger paycheck just because you felt like you deserved a boat, a 4-wheeler, a vacation. Knowing your compensation in advance will help in creating a household budget.”  

Diversify income sources

The Oberbroecklings also advise producers to diversify their income sources through crops, livestock, trucking, storage units, niche markets -- whatever enterprises work into your specific operation.

“They will all likely experience different levels of return, but over time the law of averages should treat a diversified operator better than an operator who is strictly a one-enterprise operation,” Erik Oberbroeckling said. “Having one or two ventures that aren’t tied to agriculture, such as trucking or storage units, adds another layer of diversity when the ag economy gets tough.”

Consider farm business management resources

While a strong financial background is helpful as you look to start a farm with a good record keeping system, not every farmer has to be a financial wizard. If you do not have the knowledge or the time to increase your own financial knowledge, partner with someone who does.

“We use our farm business management advisor for our records including our yearly cash flows and cash flows for any new hog barns we put up,” said Vic Serbus, who farms in Minnesota.

New farmers also can find financial management information through extension and subscription services, lenders and courses at a community college or university. Local vocational agriculture teachers often are a good resource and might teach adult agricultural education classes.

Talk with successful operators

The Oberbroecklings advise their fellow young and beginning producers to pay attention to the senior operators in their area. Have a conversation with operators who have been successful. They likely will be honored and can reveal a wealth of knowledge. Regular conversations with business partners and lenders can lead to surprising results over time.

Get involved

Lastly, the Oberbroecklings said, get involved with farm or commodity organizations and develop a strong network with operators experiencing similar successes or problems. These networks can help producers keep an open mind into how the “world market” operates beyond their own farm gate.

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