As the old saying goes; “Hindsight is 2020”. So often farm operations define their profitability at year-end, waiting to see exactly where expenses end up, then trying to manage inventory, income, and taxes at the very end of the year.
Consequently, profitability is an afterthought depending on how well the variables of business were managed. Instead what would your business look like if profitability drove those variables?
2020 Cash Flow
It’s easy to roll last year’s cash flow into an estimated 2020 cash flow, adjust for crop rotation inputs and expenses, match income to expected productivity; then hope for the best. Instead of using last year’s numbers, start with a blank form. Only populate new numbers with a fresh analysis initially. Eventually you can do comparisons to the prior year, but only after you’ve thoroughly done your due diligence by line-item expense.
This exercise will force you to critically think through each expense. The process is somewhat painful, but it produces a much stronger understanding of the numbers and can improve accuracy significantly.
Most operations have detailed accounting systems, some with cash accounting and others with accrual. Accounting information is critical for your business; however, using the data as the sole set of information for making decisions into the future could steer you in the wrong direction.
Accounting shows only current and past data – it’s postmortem information. Think of your business as a vehicle driving down the road. Accounting is the rearview mirror of your business, showing you only where you’ve been. Strategic planning, cost of production and forecasting tools are your windshield. You need both views, but few spend enough time on the windshield of the business and too much time looking backward.
Profit planning begins with a new strategic plan each year. Forget last year’s numbers and start fresh with three categories: expenses, production and market price targets. Plan your expenses by line item, set your production goals, and let that drive your marketing strategy.
There are endless tools available for simply analyzing and calculating your cost of production accurately. The primary issue for most farmers is insufficient time dedicated to populating these tools with accurate numbers.
Cost of production is a moving target throughout the year, and it can only be managed as well as the numbers are managed along the way. Just because you have your cost of production calculated in January doesn’t mean that will be your cost in October. At a minimum your cost analysis should be reviewed every 30 days as variables such as expenses, weather, growing conditions and other revenue streams impact your bottom line.
If you would like a list of strategic planning tools to help you look through the windshield of your business with 2020 vision, email me at [email protected]
To grade your financial success from last year and prepare for 2020, ask yourself these six after-harvest questions. Find the list at AgWeb.com/after-harvest-questions
Chris Barron is director of operations and president of Carson and Barron Farms in Rowley, Iowa. He is also a national financial consultant for Ag View Solutions.