It’s important to prepare a financial scorecard at least once a year. An effective scorecard will give you historical and prospective information. There are many scorecards that can be tailored to your operation; I’ve designed one below.

How to Score It. For each process, rate yourself:

0 = Not using the process at all

1 = Started using it, but don’t understand it

2 = Regularly using the process and understand its goals

3 = Actively using the process, know what the process is and how to effectively use it

Process #1. Do you prepare your books on the accrual basis, matching income and expense? Many farmers use the cash method for taxes, but should use the accrual method for their operation.

Process #2. Do you prepare and use an annual budget? This budget should guide decisions and reflect the farm’s total income and expenses, including personal living expenses.

Process #3. Do you prepare a three- to five-year strategic plan incorporating new acres, types of crops and working capital needed? This should be up-dated annually and include a projected balance sheet and income and cash flow statements.

Process #4. Do you plan for your three-legged financial stool? This involves allocating resources to the farm operation, your retirement and other financial needs. See the February 2012 issue for details.

Process #5. Do you prepare crop margin analyses? This is a margin analysis of each crop planted, to see which is best. Consider long-term benefits that might arise. For example, planting beans after years of corn-on-corn should result in additional fertility the following year.

Process #6. Do you properly use current and long-term assets? Recent years have been good and many farmers have purchased equipment to keep tax liability low. However, it’s easy to use all of your current assets, which might result in liquidity loss. Are you monitoring and projecting the proper use of your assets and how they should be deployed?

See Comments