If you had time to go golfing or perhaps mini-golfing last summer, you likely filled out a scorecard to track your success (or lack thereof). Keeping score allows you to track your progress and rank yourself against your competition. The golf clubs, green fees, and your time represent a significant investment and the scorecard measures your performance. Some may quit keeping score if the round is not going well, however, this does not change the outcome.
Your farm’s financial performance is recorded in the form of accrual financial information. Your financial statements reflect the decisions you make regarding your land, equipment, agronomy, marketing and other operating decisions. Regularly reviewing accrual financial information, ratios, trends and benchmarking will inform future decisions affecting your farm.
Accrual financial information
For income tax reporting, farmers typically use the cash method which reports transactions which appear on your bank statements during the fiscal period. To monitor your farm’s financial performance, accrual financial statements should be prepared.
Accrual financial information captures transactions in the period they occur; consequently, accrual information is more useful for comparing financial performance from year to year. For example, an accrual basis statement would include deferred grain sales and inputs that were pre-purchased in the previous year. Preparing accrual financial information is not limited to corporations and is available to partnerships, sole proprietors and other farm operating structures.
Ratios and trends
Because a significant portion of your capital may be financed by a financial institution, knowing how your lender is grading your performance is important. Lenders typically use ratios to evaluate credit risk — understanding the ratios lenders use is helpful in improving your ability to access credit. Liquidity, solvency, profitability and debt repayment capacity are categories of ratios to consider. Corporate farms should consider whether or not the net carrying value of equipment on the balance sheet is accurate and if farmland should be adjusted to fair market value for analysis purposes.
According to Danny Klinefelter, the creator of The Executive Program for Agricultural Producers (TEPAP) at Texas A & M, “the best organizations spend as much time analyzing what they need to stop doing as they do evaluating new opportunities.” Trend and ratio analysis can identify operating inefficiencies and assist with improved budgeting and cash flow planning.
Canadian farmers must compete globally; however, they must also be competitive locally. Gross revenue, input costs, equipment, labour, and interest costs are example of accounts that can be effectively benchmarked to other operations in your region. Benchmarking can validate competitive strengths or identify weaknesses in your operation.
Up-to-date records provide management with better information to make decisions. Consider bookkeeping, inventories, agronomy and other management information. This up-to-date information will allow your advisors to provide you with better advice. Your scorecard from a year ago may not be an accurate reflection of your current performance. Seek training or assistance from your professional accountant to help you develop your farm financial scorecard and improve your farm financial performance.