There are more opportunities to make your farm successful than selecting the right inputs for 2020.
Whether you are a producer of grain, tobacco, livestock, or all three, one goal that you should set is to improve your recordkeeping. Even the sharpest managers have room for improvement.
Something more than a checkbook register is needed to identify where input expenses go. Computer recordkeeping software is available and used on many farms. If that does not interest you, Kentucky Farm Record Books are a tool that can be easily adopted to record information used in tax preparation and tracking production expenditures.
These books can be purchased at the Extension Office for $5. The best time to begin keeping a farm record book is at the beginning of the farm business year, or the same time period used in reporting for income tax purposes. Record books enable you to prepare more accurate tax returns, identify your net farm income, and can be used to measure your gain in net worth.
At the end of the season, the record book will allow you to prepare a budget and cash flow projections for this year based on last year's experience.
Creating budgets for the crop and livestock enterprises on your farm is another tool to identify anticipated production expenses and projected income.
If you have internet and Microsoft Excel software on your computer, user-friendly budgets for all crops and livestock categories common to Kentucky are available online at http://www.ca.uky.edu/agecon/.
These budgets are generated using input costs, production yields, and price surveys from across the state, but can be tailored by the user to enter specific costs, expected yield, and projected market price. Budgets are very important in projecting cash flow needs of the farm during the production season, and the amount of money that will be needed to produce the intended crops.
By realizing the cash on hand at the beginning of the season and the amount that will be spent is important information for determining if an operating loan is needed, or it may reveal excess cash on hand that could be invested in the farm or used to pay down debt.
The balance sheet is the third important financial planning component. It ultimately helps evaluate the financial health of the farm and should be completed at the same time each year to allow financial performance to be tracked.
The balance sheet answers three basic questions: What does the producer own? What does the producer owe? And, what is the difference? This is called equity or net worth. Balance sheet forms can be found in the Kentucky Farm Record Book as well.
With a completed balance sheet, financial measures can be calculated for a better idea of the health of the farm business. The liquidity shows if a farm can meet its financial obligations when they come due. The current ratio compares the dollar value of current assets to the dollar value of current liabilities.
Working capital measures the amount remaining if all current assets were sold and all current liabilities were paid. It calculates the amount of capital available for the farm to work with the next year.
The debt to asset ratio reflects how much of the farm's assets are financed through debt. The equity to asset ratio calculates how much of the farm's assets are financed through the owner's equity in the farm.
The solvency ratio is the debt to asset ratio which shows how much debt capital is being combined with equity capital. If the debt to equity ratio is less than one, then the farm owner has more money in the farm than the lender.
Take time to discuss these aspects of your farm business with your accountant, bookkeeper, or banking professional. They will be able to help you get started with any or all of these financial tools.
The Kentucky Farm Business Analysis program within the University of Kentucky College of Agriculture is another partnership available to you. Specialists provide cost/income analysis of association member records and much more for a nominal annual fee.
For more information, call the Ohio Valley Farm Analysis office at 270-827-1395.