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Defining the first limiting factor of farm’s financial success

Your Farm Business

March 2, 2012
From Wayne Schoper and Rich Baumann - South Central College , The Journal

(Mark Wehe is a farm business management instructor with South Central College in Mankato. He is this week's guest columnist.)

Regardless of the area of production or financial management being studied, there are a set of foundational factors that must be addressed before any long term improvement can be realized. Does it make economic sense to fertilize for maximum crop yield when the field needs tile or feed a cow for high milk production when the forage quality is poor?

When reviewing limiting factors to wealth accumulation, one common issue that separates those who achieve high levels economic independence and those that struggle is the ability to have clear and quantifiable goals in place.

In 1979 Harvard asked all of its new MBA graduates about their future professional goals and only three percent reported having clear and written plans. Fourteen percent reported having goals and plans, but not written and the final 83 percent reported having no clear goals or plans

Ten years later, Harvard interviewed the same group and 27 percent, all from the no-goals group, were not financially self-sufficient. Sixty percent described their financial status as living from paycheck to paycheck. Ten percent responded as living comfortably and three percent said they had achieved financial independence

The 14 percent of the class that had specific goals, but not written, were earning twice as much as the 83 percent who had no goals at all. The three percent who attained financial independence were the identical group that reported that they had written goals ten years earlier. What was more striking is that their earnings from investments and businesses were 10 times greater than the total income of the remaining 97 percent!

Farmers, like all small business owners are stretched between multitudes of tasks every day. Taking the time to formalize goals into a business plan seems like a daunting project that doesn't have an immediate impact on their operation.

One of the biggest misperceptions of using a business plan is that it has to be a substantial piece of literature. Nothing could be further from the truth and can be as simple as a one page document. An effective plan should save you time and address goals that are immediate as well as long term. It should utilize current financial documents that you already have in place such as balance sheets, cash flows, and financial analysis data. Do not forget to indentify goals that include the well being of your family, it should be ultimately be one of the most important items to be addressed. And above all keep it relevant, simple, and current; it is meant to be a guidepost in a volatile market place.

Recent examples where I have seen farmer's actively utilizing business plans have been in marketing. I have observed farms that set commodity pricing goals based upon a simple matrix of financial performance objectives that were defined within their plan. These objectives included items such as repayment capacity, operating profit margin, working capital and debt to asset valuations. This approach appears to have removed a significant amount of emotion in making pricing decisions in a time of high volatility.

One of the best tools I have found for assisting farms on this topic and is available to anyone is AgPlan, a business planning program available on the University of Minnesota's Center for Farm Financial Management on line site; cffm.umn.edu . It provides a format that will lead you through a very practical set of planning topics and help you organize your thoughts. You can find a farm business management instructor at www.fbm.mnscu.edu.

 
 

 

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