Strong financial management on the farm doesn't come just from one particular practice. It's a combination of good habits that help you interpret what the numbers in your operation are telling you. And these practices should be geared toward helping you consistently do everything a little bit better on your farm. That's what the most successful farmers are doing today.
Ag economist and speaker David Kohl says that according to studies done by ag universities, there's about a 60% difference between the financial information on your farm that gets reported for tax purposes and what actually happened in your business that year.
It's almost impossible to manage things well just by looking at your tax records from the previous year. Those records don't give you the full picture of what's happening in your business.
You don't want to be making major decisions for your business with information that's 60% inaccurate. You want the most accurate data possible, so you need to be using accrual-based statements and analysis.
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Your banker or financial consultant can help you put an accrual statement and analysis together. Using this in your decision making is one of the best financial practices you can put in place. These are the types of practices that put you ahead of the game – because you're highly aware of what's going on.
Another area to manage carefully is your working capital. A healthy ratio of liquid assets in your operation is especially important when opportunities come up – like the chance to buy a piece of land close to home that you've always had your eye on or a good deal on a piece of equipment you need.
Develop good financial habits
I've talked about how your farm's financial metrics are like the numbers that you get from your doctor when he runs tests to measure your health. Knowing those numbers is how you find out what's going on in your body and what you can improve.
They show you if your farm is healthy and thriving. They help you understand areas to work on by leading you to diagnose any problem areas. You can work with a financial consultant to interpret your farm's data and determine what you can do with it.
Think about the practices you can put in place on your farm that will help you manage your operation and keep it financially healthy. This is going to be especially important if we get into a tougher economic cycle in Ag in the coming years. Get those practices in place now to prepare your operation for the future.