There's an old business saying; "You get more of what you measure." How true this is in farming.
We measure things like yield, acres, planting accuracy and acres per hour. Watching the gauges is important every time you get in the tractor or combine. But farmers are quick to admit an area they don't measure well enough – their financials.
Fortunately, even in these volatile economic times, the most important skills in farming are still those of producing a great crop. However, strong business skills are proving to be a critical partner to production skills in order to remain competitive.
Farming is experiencing not only increased revenue volatility but also increased expense volatility. When you combine these you see huge differences in margins from one farmer to the next. Without accurate information for decision making, farmers are left formulating educated guesses. Unfortunately when we combine the volatility with the speed of change, each business decision has more impact on our business health than we have seen for decades.
A good test for our skills is how well we can build and use these critical measurements. So how do we go about transferring our farming measurement skills to good business measurement skills? It starts with a commitment to improving farm financial skills. That commitment often comes as a result of seeing how they will improve our decision making and long-term farm results.
Regardless of where you are in your farming career, you will share the same key financial "gauges". However, where your needles are or should be will be different based on your age and what you are working to achieve in your farm. Like any skill, begin with the basics. Rather than going from no measures to 30 ratios that you are measuring each week, start with four important ones that you are tracking at least quarterly.
Over the next few weeks we'll be talking in more detail about four financial gauges that can help you drive your farm. They are:
A) working capital as a percentage of gross revenue
B) equity or net worth
C) net profit per acre
D) return on assets
We'll explain how improving your farm financial skills can add to your competitive edge. Check in next week!
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