SW Financial Literacy
The 1 Thing New Farmers Should Track for Financial Success.
Farming requires tracking a lot of numbers – and sorting out if those numbers are good or bad can be a daunting task.
I started my career 12 years ago and had no idea the value that would come from beginning that career in a Credit and Underwriting department. Every day I would sort through endless pages of farm financials. Those documents were interpreted and input into our internal systems for review.
The final product spits out a lot of ratios and after seeing a few thousand of these financial packets, it became easier to make sense of what is there.
Owner’s Equity (Total Equity/Total Assets) measures the amount of leverage compared to your assets and is a pillar for monitoring your financial health. A 55% Owner’s Equity (OE) tells you that 55% of your operation is owned free-and-clear while 45% of your assets have debt against them. Having an OE over 60% is ideal for an established operation.
The problem with OE for young operators is that 60% is an unrealistic goal as you try to grow.
Monitoring and increasing your cash (or liquidity) position gives you the ammo to create growth and financial success while reducing your risk of running out of funds to raise the crop.
Working Capital (Current Assets – Current Liabilities) is a great place to start but can be deceptive based on the size of your operation. $50,000 of Working Capital would be great if you are farming 100 acres but worrisome of you are covering 1,000 acres. Current Ratio (Current Assets/Current Liabilities) can be a better way to look at your liquidity but becomes unreadable if you are operating with cash at certain times of the year.
A 1 size fits all approach does not always work with either of these tools, so how do we create a tailor-made method for your operation?
Working Capital per Acre (Working Capital/Acres Farmed or WC/A) solves the earlier problems mentioned. It 1) Is measured against the size of your operation, and 2) Won’t be impacted by low Current Liabilities. A farmer having Working Capital of $125,000 while farming 400 acres would have a WC/A of $312.50/a.
WC/A above $300/a in 2023 would be a good point to aim for and continue to build on, now it is time to track your WC/A year over year for financial success.
If you are managing your expenses well, producing a good crop, and getting that crop sold in the top 50% of the markets, WC/A should grow most years. Calculate your WC/A at least two years back and again for the current year. When you have losses, diagnose where you had difficulties and work to improve your position for next year.
2021 farming 200a with WC of $87,600 = WC/A of $438. 2022 farming 350a with WC of $135,450 = WC/A of $387. 2023 farming 350a with WC of $173,950 = WC/A of $497.
When you can string together multiple years of growth in your WC/A trend, you are on track for financial success.
Have a great week!
Grant
All views expressed on this site are my own and do not represent the opinions of any entity whatsoever with which I have been, am now, or will be affiliated. Information provided is authentic to the best of my knowledge, and as such, is prone to errors and the absence of key details. The content of this blog is for entertainment and informative purposes and should not be seen as professional advice to finances or any other field.