Business Matters: Start Wrapping Up Your 2015 Financials

October 27, 2015 02:44 PM
Business Matters: Start Wrapping Up Your 2015 Financials

As harvest nears completion, you’re likely to feel a sense of tremendous relief. Whether it was your biggest crop or worst crop ever, it’s always a great feeling to get another crop year behind you. 

Undoubtedly, you will still be focused on things such as fertility management, tillage, grain storage, equipment maintenance and other fall activities. Yet as the pressures of harvest wind down, take a couple of days to rest your body and mind. Then transfer your focus from the field to the financials. 

Calculate Profitability. Just as the combine gives you absolute production yield, an office-centric mind will give you absolute profitability yield. Once harvest ends, take time to understand your production cost. The hypothetical checklist on this page shows how a corn farmer might evaluate costs. 

Be sure to calculate each expense in terms of cost per bushel. This helps you understand the value of incremental changes. You might assume an expense is significantly higher this year than last year when it might only represent a difference of 2¢ or 3¢ per bushel. 

From a marketing perspective, you now have an absolute number. Yet for many growers, their cost of production is larger than the current marketing opportunity. This information creates tremendous motivation for building a plan. 

Sales And Gaps. There are almost endless strategies to capture improvements: store the grain and capture the carry, sell on strong basis opportunities and re-own with futures, sell and buy call options among them. Whichever strategies you choose are up to you. Find a strategy that works and be disciplined in executing it. In some cases, the best solution is to minimize a loss.  

You should also create a chart highlighting expenses and income accurately from each of your profit centers. This is critical to determine which parts of your business are performing and which ones are lagging.

Once you’ve tallied up total expenses from each profit center, make sure they match up with total expenses at the bottom of your cash flow. I often find a financial gap where each profit center expense doesn’t quite add up. Overhead expenses such as health care costs and family draws might be omitted. 

Whatever your overhead number is, it should be plugged into a category labeled “return to management” and divided by total units of production. For example, the chart on this page lists return to management as $44,800. Thus, the producer has 29¢ per bushel invested in overhead costs.  

Every Dollar Counts. Setting the combine to capture all the grain takes significant attention to detail. The same focus is required to capture every dollar from your farming business. In my December column, we’ll discuss more specific action plans geared toward profit center data collection and analysis.

How To Assess Costs Per Bushel
List farm expenses line by line to evaluate cost per bushel. This example illustrates common costs that an 800-acre farm with an average corn yield of 196 bu. per acre might encounter. Add other costs as needed.


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Spell Check

Wanda Adams
Newellton, LA
10/28/2015 08:54 AM

  Very good article. However, did you account for landlord's rent, farm labor, CPA & legal expenses, diesel/fuel, supplies, workman's compensation fees, electricity for irrigation wells, etc. Thanks.


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