The end of the growing season means many things for us farmers. In an ideal world, the coming winter is a time to rest, reflect on the previous growing season and make plans for the next one. And, in addition to being qualitative, that reflection should be quantitative as well. Here are some financial analyses that you can use this off-season to better understand the last growing season and begin to prepare for another year of farming.
Types of Financial Analysis
In office work environments, people distinguish between documents that are meant for internal or external consumption. I like to think about financial analyses in the same way. Financial statements meant for external consumption are the ones that someone else (frequently a lender) wants you to create.
Financial analyses meant for internal consumption, on the other hand, are meant only to be useful. They are statements that help see where your business stands, or which aspects of it are or are not working.
These are some of the financial statements that I try to run (or update) at the end of every farming season. This list is by no means exhaustive, but together these three analyses will start you in the right direction.
Check Your Operating Budget
If you assiduously track your expenses throughout the growing season, you can skip this step. And if you don’t, I recommend that you start. I personally track my operating expenses alongside my budget in real time so that I can always see if I’m about to go over any category.
If you haven’t already checked your operating budget for the year, though, do so now. Did you spend far more in a specific area than expected?
A balance sheet is a favorite request of lenders, but it can offer you some valuable information as well. People commonly describe a balance sheet as a “snapshot” of your business at a particular moment.
In essence, a balance sheet compares the farm’s assets (money in the bank, value of equipment, etc.) with its liabilities (money owed). The difference between those two is the farm’s equity.
A balance sheet shouldn’t be taken as the absolute indicator of financial health, but it does provide a useful perspective of your farming business. It can also be helpful to compare balance sheets over time to see how your equity grows (hopefully). Michigan State University Extension has a helpful balance sheet template for those putting one together for the first time.
Enterprise analyses are investigations of the profitability (or not) of a particular part of your business. You might be making a $1.00 profit for every bunch of beets you sell, for instance, but losing $0.50 on every bunch of carrots. (Yes, that is possible).
In short, an enterprise analysis works by comparing the cost to produce an individual item (say one bunch of carrots) with the price you’re selling it for. Determining the exact cost can require some careful record keeping. But, estimates can sometimes get you pretty close if you’re just starting out.
Although financial analyses might not be the most exciting part about farming, they are critically important. And those farmers who work to understand and improve their finances are sure to have a better farm business in the long run.