Know where you are. That statement laid the foundation for a top ten financial to-do list given to members at the recent National Farmers annual convention in Mason, Ohio, by Dale Nordquist, associate director, University of Minnesota Center for Farm Financial Management.
Nordquist made one important clarification. “I don’t have ten things that when you implement these things automatically everything’s going to be profitable and all better….We haven’t found that secret potion that makes everything work yet,” he said.
“The difference between high-profit farms and low-profit farms, it seems the high-profit farms do just a little bit better in everything that they do,” Nordquist said. “They seem to get a little bit better yields. They get a little bit better prices. They have a little lower costs and that little difference makes a big difference in the bottom line.” A Texas A&M professor came up with the idea that the more profitable farms do five percent better across the board than their neighbors, Nordquist said. This is not farm-size related. “Small changes make a lot of difference,” he said.
Nordquist listed the top financial to-do list priorities for farm operations today.
1. Know where you are;
2. Know where you’re going;
3. Use your accounting records for something more than taxes;
4. Understand volume and margin;
5. Manage working capital;
6. Control costs;
7. Do 5 percent better;
8. Don’t refinance unless you plug the leaks;
9. Think countercyclical; and
10. Don’t go it alone.
True financial position
For producers to know where they are financially, Nordquist emphasized they need to prioritize completing balance sheets, minimally once each year.
“Complete your own balance sheet,” Nordquist said. Lenders shouldn’t be filling out farmers’ balance sheets for them. Further, farmers need to monitor their debt-to-asset percentages, working capital and change in net worth.
The farm financial whiz also corrected an important point about what’s most important in determining if a farm is profitable.
“I’ll go so far as to say the single-best measure of overall financial performance for family farms is net worth change, or what lenders prefer to call earned net worth change,” he said. Producers are likely more familiar with the term retained earnings. “We do know if this is positive, we move forward for the year.”
Tax points
Nordquist also pointed out that showing as low a net farm income on the Schedule F tax form as possible is good tax management. However, when it is time to receive approval for a loan, it can work against producers. It is also a poor indicator of farm performance, but lenders know it’s the only information source they can get from many operations.
“It just doesn’t provide as much financial information for performance of the business,” he said.