I’ve been discussing the top seven practices of successful farm management. In this article, let’s focus on the last three.
No. 5 on the list is knowing your cost of production. I break costs of production out into three components: direct, variable and fixed costs.
Direct costs are those expenses that have a direct impact on your production capabilities. These are your inputs: seed, fertilizer and chemicals.
Variable costs are those such as labour, machinery, utilities and cost of living.
Fixed costs are the costs of land, buildings, taxes, and overall farm financing costs.
If you have an aggressive production plan, your total projected input costs may be a little scary, but if you hit your yield and pricing targets, the profitability will be there.
Buying or renting more land could impact your debt servicing ability, but may improve your earning potential by maximizing your machinery usage.
You can’t guarantee yields, quality or price, which determine your total gross revenues, but you can control the costs of production that determine your net revenues.
The risks of farming are many and varied. From loss or destruction of property to production risks, loss of livestock, loss of life, family discord, health issues or liability for others.
As the business owner or manager, be aware of where the risks are and what you can do to reduce or mitigate those risks.
Budget and financial plan
To manage your farm’s financials, you will need to be able to see how your information varies from year to year, and to benchmark your farm against industry peers.
You will need consistent numbers. The best way to get those is to use accrual accounting practices. This will give you consistent, comparable numbers which will help you make better management decisions.
Year-over-year comparisons of your farm’s financials give you a quick and clear picture of how your farm is doing, if it’s growing or falling behind.
Are your expenses outpacing your revenues? Where are expenses increasing? Could you take on more debt to buy land or machinery? Maybe you’re overpowered with machinery for the land you have. Can you improve your cashflow?
For benchmarking information, visit the Alberta Agriculture website and look for Agriprofit$ cropping benchmarks.
You are likely already doing a lot of this, but maybe not writing it down in a formal plan, inputting it into a software program, or sharing it with others on the farm.
Start by creating a vision of what you want your farm to be in five, 10 or 20 years. Include those that will be there at that time. Analyze risks for that farm vision, so you’ll be prepared for the future.
Have conversations with those who can help make your vision a reality. This could include accountants, bankers, consultants, agronomists, and insurance advisors. Most importantly, talk to your family members. Often.
Seven key practices
I’ve previously mentioned Farm Management Canada’s research and its findings of seven key farm business practices that top farm managers use. These seven practices are:
- Ongoing skills development, lifelong learning.
- Make business using accurate financial data.
- Seek the help of business advisers/consultants.
- Have a written business plan, review it annually.
- Know your cost of production and what it means for your profits.
- Assess risks and have a plan to manage and mitigate risk.
- Use a budget and financial plan to monitor your financial position and options.