A young grain farmer who attended a recent delivery of my Farm Financial Workshop said he came because he felt financial management was the “weakest link” in the overall management of his farm. He explained that he has put a lot of focus on managing his agronomy and marketing and feels pretty comfortable with his knowledge, performance and the consultants he has hired in those areas, but his business and financial management needs to improve. The reason is, in his view, “you are only as good as your weakest link.” I was impressed with his insight and frank self-assessment.
I came to a similar conclusion, on a broader industry basis, last January when I attended and spoke at Alberta Agriculture’s Agronomy Update conference held in Lethbridge. Listening to all the plant scientists, applied researchers and leading farmers present on the latest and greatest advances in agronomy got me thinking about how that compared to advances in farm financial management and how farmers manage their credit. The significant yield improvements we experience in crop production through better varieties, fertility and pest control are proof that real gains are being made. From my experience and perspective as a farm management consultant (and as a recovering ag banker!), business and financial management on farms has not kept pace with significant improvements in on-farm agronomy and production management. As an aside, marketing is somewhere in between. Marketing skill and performance are improving significantly on many farms but still lag agronomy knowledge and production skill.
I expect this conclusion is not a surprise to most if not all Grainews readers. Almost by definition, farmers tend to have a lot more passion and interest in crop production and farm equipment than financial statements and annual credit reviews or even futures markets and options! However, as margins have become tighter and profits harder to come by, the scale of many farm businesses has grown to the point where six and seven figure gross incomes and multimillion-dollar asset bases have become much more common, as have million-dollar debt loads. In any industry, businesses of this scale require a higher level of financial management.
It is my opinion that generally in western Canadian production agriculture, we need to tune up our financial management skills and business acumen to keep pace with the scale of our business operations. This is important not only to ensure we are making money (or know why if we are not) but also to provide the management information required on an ongoing basis to make sound financial, borrowing and investment decisions. We also need to keep our lenders onside and happy with their investment in our business. The very best way to do that is by proving through your knowledge, understanding and performance that you are a top financial as well as production and marketing manager.
Let’s be frank here, for the older well-established producers this is less of an issue because they have a lot of equity and many have developed some financial management skills and a good reputation as a borrower over time as the farm grew and the business became more complex. But for the younger generation coming back to and taking over a farm and likely needing or wanting to grow it, the issue is more acute.
So to get practical here, what should a young farmer be doing if he wants to get better at the financial management side of his business?
FINANCIAL MANAGEMENT TIPS
My advice is to start with spending more time understanding and analyzing your financial statements. In my experience, financial statements are underutilized as a management tool and the common practice of sticking the statements in a file until the banker needs them is not serving us well!
First off, I am assuming you have accountant-prepared financial statements as part of the annual tax-filing ritual. If not, that would be recommendation No. 1. Be sure you have a good chartered accountant or someone well qualified to prepare your statements. This is money well spent. These days I think most farmers are using one of the common ag or business software accounting packages that will print a decent set of statements. However unless you have some accounting training, the year-end and cash to accrual adjustments can be pretty hard to get right. A good place for the novice young financial manager to start is to be sure you know if your income statement is cash or accrual based and that you understand the difference. Our good Internet buddy Google yields some great articles and learning opportunities with a search for “farm cash versus accrual accounting” or something similar. I encourage you to have a look.
If you are prepared to spend the money, the accounting professionals will likely analyze or help you analyze your statements, but I think you are better off (not just financially) if you develop this skill yourself. It’s your business to manage. And frankly, your lender doesn’t need to know if your accountant understands your financial statements. What your lender really wants to know is that you understand the statements!
This is the first in a series of articles I will write for Grainews. Future articles will provide you insight into how ag credit works from the lender side and how you can better manage the financial aspects of your farm business AND your ag lender.
Earl Smith, P. Ag., lives near Sundre, Alta., and does farm and business consulting in the areas of business management, finance and succession. He was previously with RBC Royal Bank where his last position was manager, Agriculture and Agribusiness, Prairies. Contact Earl at 403-586-2504 or [email protected]with questions or comments and for upcoming dates and locations for his Farm Financial Workshops sponsored this winter by Agri-Trend Agrology.