Nov. 6, 2023

This paid piece is sponsored by Eide Bailly LLP.

A version of this article first appeared on EideBailly.com.

By Callie Beisch, senior manager

Managing the finances of your agricultural business is just as important as how you handle the nuts and bolts of operating it. While there are plenty of uncertainties you can’t control like inflation or weather, focusing on financial management can help you understand:

• What areas of your business are truly profitable.
• If you’re increasing the net worth of your business.
• Projected cash flow and profit across the business in three years, five years or longer.

Understanding your finances

To achieve financial predictability, you need a solid grasp of your farm’s financial basics, including:

• Financial statements: These show the cost of production and profit margins.
• Income statements: Help you identify profitable areas and areas for improvement.
• Balance sheets: Reveal your business’ net worth trends.
• Monthly/quarterly cash flow statements: Analyze your expenditures and spending trends.
• Net worth statements: Summarize income, expenses and actual cash earnings.

What financial metrics or KPIs should you monitor?

KPIs are essential for business predictability. They help you set clear goals and make data-driven decisions. In agriculture, three critical KPIs are:

• Profitability: Measures return on assets, equity and operating profit margin. These metrics indicate your farm’s efficiency and profitability.
• Size: Assesses whether your business is large enough to generate profit consistently, considering market shifts and income needs.
• Growth: Focuses on your farm’s potential and the strategies for sustainable expansion.

Better financial management can help you handle future risks

Enhanced financial management and analytical oversight can help optimize your agribusiness operations and prepare for uncertainties. By projecting cash flows based on expected income and expenses, you can anticipate cost overruns and plan accordingly.

Regular equity and asset analysis against net farm income can indicate potential trouble or short-term cash flow issues. For example, selling livestock for short-term cash flow may impact milk production in the long run. Effective financial management can help predict and mitigate such problems.

Outsourcing financial management

Although many uncertainties are out of your control, focusing on financial management can help you understand what areas of your business are profitable, if you’re increasing the net worth of your business and project future cash flow.

Outsourcing your accounting functions is an option that farming operators increasingly turn to as running their farm grows more complex.

Outsourcing your accounting practices can:

• Give you the information to make more data-driven decisions.
• Help you understand impediments to business profits.
• Offer road maps to withstand future challenges to your financial solvency.
• Free you up to focus on building your operation.

Eide Bailly’s Agribusiness Finance Solutions team is the trusted outsourcing partner of small to large farm operators nationwide and one of the few accounting firms specializing in this area. Our experienced agribusiness advisers can help you manage your accounting and financial processes to help you plan for a more profitable farm operation that can withstand future storms.