Understanding the Farm's Financial Health: Basic Components to a Successful Business
DOWNLOAD FILENovember 28, 2018 - Author: Jonathan LaPorte, Michigan State University Extension
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EmailUnderstanding your farm’s financial health is the key to successfully meeting your farm goals. Michigan State University (MSU) 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 often not normally the topic of conversation. Almost always, a discussion on finances centers on 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’s look at another activity often considered influential to farm activities: soil testing. We know that the results of a soil test can tell us a lot about the 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, one farm’s soil test reveals that the pH has a lime index of 67 and a pH of 5.9. The farmer wants to have the pH at 6.5 and from the test results, determines 2.5 tons of lime needs to be applied. The farmer applies 2.5 tons to that plot of land and raises the pH. Because the farmer was aware of the challenge, the right solutions were found and implemented to overcome them. This made the soil test an important tool as it provided information to help make a decision that will have an impact on 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 the business’ current profitability and productivity. As margins get tighter, managers know they must do more with less and become more efficient in order to survive. Just like knowing the results of 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 similar to those asked 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 from which to form a plan.
