From time to time, Wheatland features events for their clients as well as the community.
How is your farm's blood pressure, reflexes and balance? When you get to the age of the writer of this article, they say you should be going to the Dr. for an annual checkup!! Your farm is no different - but this applies not only to aged mature operations like me, but rather to farms from infancy to third or fourth generation!
How can we check the health of your farm business? It starts with good records prepared using the accrual accounting method which matches income to the year it was produced with the expenses incurred to produce that income. If your farm is incorporated, chances are pretty good that you have had a set of financial statements prepared using this method and will have Balance Sheet, Income Statement and Cash Flow Report.
It all starts here, pull out the stethoscope, blood pressure monitor and lay the patient out in front of you and begin your examination!
First look at the balance sheet and tweak it to become a net worth statement. To truly consider this farm's health we need to know what the fair market values of its assets are. Your balance sheet is likely showing the fixed assets (capital assets) at cost less depreciation. This can create a value considerably different than the fair market value of those capital assets. Once you have done that you can adjust your retained earnings to offset the additional asset value you have created, so that the net worth statement remains in balance.
Now you are set, take a deep breath and start examining and testing the details of your patient's health. Several tests will be done and just as with your own health you want each test to fall in the "normal" range. These tests came from Alberta Agriculture, but should be pretty applicable to our area too.
- Expenses (not including Interest) should be less than 65% of gross revenue. The smaller the % the greater the ability to generate profit.
- Operating loan plus accounts payable and cash advances should be less than 50% of the current value of unsold inventory, pre purchase crop inputs and accounts receivable.
- Machinery investment should be less than 1.5 times gross revenue (crop producers) or less than 1 times gross revenue (cattle producers).
- Are you living off of depreciation? Equipment value x 15% < should be less than cash paid for equipment + principle payments in year. If you meet this test you are not living off of depreciation.
- Debt + lease payments per year should be less than 15% of gross revenue.
- Total debt could be paid off in less than 5 years if all net farm income directed towards payments.
- Take your living costs that come from the farm and consider it to be like land rent! How much is the farm paying you for land rent per acre! Is it sustainable?
These are just some of many tests that could be done, but if you passed all of these your farm should be resilient as you go into the next year - don't forget to do this every year to spot areas of concern. Like your own health it is better to catch problems early and it is often in comparing year to year that we spot developing Trends