Understanding the farm’s financial health - Part one
Part 1: Basic components to a successful business.
Understanding your farm’s financial health is the key to you successfully meeting your farm goals. Michigan State University Extension Farm Management Educators want to help you understand this key concept.
That first sentence may sound strange at first. When you attend an informational meeting about successful farming, financial health is not normally the topic of conversation. Typically, Finances are spoken about being impacted by achieving better production, marketing for higher prices or lowering expenses, but without understanding what your financial health is and how it influences production, how do you know what improvements to make or market prices you need to be successful?
Still not convinced? Let us look at another activity considered influential to farm activities, soil testing.
We know that the results of a soil test can tell us a lot about our farm, from available nutrients to soil structure and even overall soil condition. We use this information in shaping fertilizer programs, chemical uses, irrigation scheduling and even yield goals. However, these tests will also help us to discover unknown problems or challenges that may be holding back or limiting success.
For example, a soil test reveals that the pH has a lime index of 67 and a pH of 5.9. The farm wants to have the pH at 6.5 and the test results determine it needs to apply 2.5 tons of lime. The farm applies 2.5 tons to that plot of land and raises the pH. Because the farm was aware of the challenge, the right solutions were found and implemented to overcome them. This made the soil test a very important tool as it provided information to help make a decision that will impact the farm throughout the year.
The value of understanding your farm’s financial health is similar to the value found in soil testing.
How is understanding financial health even valuable?
Financial health is a measure of the farm’s financial situation, which describes how profitable and productive the business currently is. As margins get tighter, managers know that they have to do more with less and become more efficient in order to survive. Just like a soil test, knowing the financial situation provides knowledge about where efficiencies already exist and where improvement efforts should start.
The questions asked when considering a soil test are very similar when considering the farm’s financial health. How much do we have to work with already? Do we have any available assets that can be helpful? How much do we need to add to our plans to reach our goal? The answers to these questions give us a foundation and a starting point that we can plan from.
Think about what your farm currently has to work with from a financial health perspective. Do you know how efficient the farm is? What available assets are you using or not using towards those farm goals? What areas could improvements be made?
Keep these ideas in mind as we dive further into the value of understanding the farm’s financial health in the next part of our series. There we will focus on collecting the core samples needed for a "financial" soil test to help us better answer those questions.
This is the first 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 two.
Basic components to a successful business part three.
Basic components to a successful business part four.