Impacts of financial decisions
A Farm Financial Scorecard Is a Powerful New Year’s Resolution
We suggest that our farm clients prepare a financial scorecard at least once a year, and with the new year approaching, now is a good time to commit to developing or refining yours. A scorecard highlights important financial areas that might be addressed throughout the year. Every client’s situation is unique, but the scorecard below provides a sample of the kind of questions you might ask.
Farm Financial Scorecard
0 – Not using the process at all
1 – Started using it, but don’t understand it
2 – Regularly using the process and understand the goals
3 – Actively and effectively using the process
|1||Do you prepare your books on the accrual basis, matching income and expense? Many farmers use the cash method for taxes, but should use the accrual method for their operation, because it more accurately reflects their financial position.|
|2||Do you prepare and use an annual budget? This budget should guide financial decisions and reflect the farm’s total income and expenses, including personal living expenses.|
|3||Do you prepare a three- to five-year strategic plan, incorporating new acres, types of crops, and working capital needs? This should be updated annually and include a balance sheet, income statements, and cash flow statements.|
|4||Do you prepare crop margin analysis? This analysis of each crop will tell you which crop is most profitable. Consider long-term benefits from using crop rotations to add to soil fertility.|
|5||Do you analyze and properly use current assets and long-term assets and liabilities to fund operations? In good years it makes sense to purchase equipment to keep tax liability low. However, monitoring liquidity is important and will ensure that you have assets to use in hard years.|
|6||Do you know your operation’s financial ratios and prepare them annually? For ratios to make sense, your books need to be on the accrual basis. How do your current ratios affect your operation? What is your debt to net worth ratio? How much income is generated to cover debt service? There are several key ratios to calculate. Are you using them?|
If your score is less than seven, you have a lot of work ahead. Pick one or two processes and begin working on those. If your score is between 7 and 11, you are headed in right direction, but still need to improve. A score of more than 12 means you are doing a good job, but challenge yourself to find a couple of other farmers you can help increase their score.
If you don’t currently use a scorecard, make it your New Year’s resolution to try it this year. If you already use one, commit to scoring higher. Maintaining a financial scorecard is a challenging resolution, but you might find yourself using it more often than that health club membership.