Understanding the farm’s financial health - Part four

Part 4: Basic components to a successful business.

Using the analysis of farm financial health makes it valuable. It puts you in control.

In our last part of the Michigan State University Extension series, we focused on the value of understanding the farm’s financial health and began with our “financial” soil sample of the farm. Knowing when to take these samples is as critically important as the samples themselves. 

Just like taking a soil sample, we need to think about when we test our farm’s financial health and review those critical financial documents. Reviewing them does not have to happen every day, but awareness of what’s in them should be ongoing throughout the year. Routinely take time to look at your records and get an idea of what is going on in the checkbook. Set aside time at least once a year for a more in-depth review, preferably prior to meeting with your lender or tax preparer.

Why before meeting the lender or tax preparer?

Farm managers often forget that they are still the decision makers. Especially when meeting with lenders or tax preparers. The lender has to approve a loan request and the tax preparer ensures taxes are filed correctly, but who leads the financial discussion? Who knows what the farm’s plan is, the challenges to that plan, and how they are going to be addressed? That responsibility always falls to the farm manager. If you wait for the lender or the tax preparer to tell you these things, it is unlikely your farm will be successful long-term.

Keep in mind that as the decision maker, you are meeting with these individuals to discuss the plan, and not the problems, for your operation to continue moving forward. The lender is there to consider a financial investment in the farm and can offer recommendations to fine-tune the plan so that it is successful. A tax preparer is aware of tax laws and can offer options on how the business can best management their tax liability. While these are important resources to assist in the plan’s success, they are still just resources. Resources don’t have to live with the consequence of a poorly designed plan. As the farm manager…you do. Take the lead of those discussions by knowing what your farm’s financial health is before walking through their doors.

This is especially important in times of a challenging farm economy. During times like these, there are tightening margins, greater uncertainty in the market place, and added weight on making the right decisions. The most difficult of these is knowing what the right decisions are for a farm to stay profitable and productive. This places a renewed focus on better information in order to minimize potential risks.

So collect those core samples and take your own “financial” soil sample of your farm today. Start to learn where your farm’s financial health is right now. Because the best resource for finding opportunities for furthering your farm’s success are right there on the farm itself. 

This is the fourth of four short articles about farm financial health. Read the other parts by clicking on the links below:

Basic components to a successful business part one.

Basic components to a successful business part two

Basic components to a successful business part three

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