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Cleaning out old file cabinets revealed a number of interesting artifacts from Extension publications over the years. Maps from the 1970s, record books from 1959, a fascinating look at the history of recommendations related to farm business management. Most interesting, however, was the realization that every decade had a new way to approach the same subject--financial record keeping.
In 1994, the context was the farm financial crisis of the 1980s; today it is the "economic downturn" or "great recession." Though the examples are different, the message is the same: farm financial records are important. Here are the top five record keeping lessons that have stood the test of time:
Regardless of the method used to keep records (pen and paper, word processing software, mobile apps, etc.), records can be of no use if they are not updated or rarely consulted to look for patterns of information. Managers can learn a lot about trends just by keeping accurate records and reviewing them regularly to look for signs of trouble. To facilitate this process, choose a method that can be easily incorporated into the current management system. Keeping a clipboard in the feed center is a fast way to track hard-to-measure inventories such as as-fed hay for the heifers.
Even if the information is recorded, it is of no use if it is not consulted regularly. Mobile apps and software can help summarize all the data that gets recorded to help spot trends and areas to focus on in the production side of the operation.
There is a saying coined by Greg Hanson who taught Penn State Extension's Farm Financial Analysis Training for many years, "When the production side of a farm performs poorly, financial problems typically follow." Managers need to treat production and finance as linked not separate. To ignore one is to see only a partial view of the overall farm picture. Financial records can help evaluate production options through partial budgeting or can help explain where efficiencies can be gained on the production side.
The work required by farm managers is often much more than can be reasonably accomplished in a given day. Prioritizing tasks into high, medium, and low levels can help break up the daunting task of keeping everything running. Moreover, delegating those tasks that would be better handled by someone else will not only increase your available time, but allow for a more efficient labor structure.
Some impacts on a farm's performance are not controllable, most notably the weather. Managers who can evaluate risk management opportunities can help control some of these uncontrollable factors. In dairy, producers are largely price-takers in the market. However, management decisions, through feeding, genetics, and cow comfort, can help improve components and milk quality, impacting the overall price. On the marketing side, insurance and contracts are ways to protect crop and milk prices in unforeseeable circumstances.
Being able to pay your bills is only one indicator that all is well on the farm. Paying bills on credit or selling equipment might allow the farm to keep operational, but will only prove disastrous in the long run. Considering only one financial statement never gives the complete picture of a farm's finances. Managers must consider the three main financial statements together: the balance sheet, income statement, and cash flow plan, to get an accurate picture of the business.
This statement was especially true during the financial crisis in the 1980s. Credit was cheap, and producers could get loans on the spot. Though this is no longer the financial climate, managers can still fall into this trap through lines of credit and the current high milk prices can give the impression that this market is here to stay.
How quickly we forget the bad years. In years like 2013 and 2014, it is hard to remember 2009 or even 2012 where margins all but disappeared, and farms that were not financially stable struggled or even failed. Futures prices reflect the inevitable downturn, and economics supports this widely accepted theory of the three-year price cycle (Nicholson and Stephenson, 2014). Positioning the farm to be able to weather market volatility can make the difference in whether the farm lasts into the next generation.
The ability to transition the farm into new hands starts with creating a positive financial environment that can withstand an unstable market. Following the guidelines presented above can help facilitate this process. One thing is for certain, there will be good times and bad ahead, and only through proper planning will farms take advantage of the good and survive the bad.
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