The Farm CPA: Prepare Your Financial Scorecard

November 14, 2012 08:30 AM

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.

"If asked what your
marketing plan was, could
you answer in five sentences
and have it make sense?"

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?

Process #7. Do you know your operation’s financial ratios and prepare them annually? For these ratios to make sense, your books need to be on the accrual basis. How do your current ratios affect your operation? What is your debt to net worth ratio? How much income is generated to cover debt service? There are five to 10 key ratios to calculate. Are you using them?

Process #8. Do you have a marketing plan? As part of your margin analysis and annual budgeting, a marketing plan helps ensure your goals are met. Is the plan in writing? If asked what your marketing plan was, could you answer in five sentences and have it make sense?

Process #9. Do you use a peer group to see how you are doing? Take the financial information gathered in the other processes and review your annual budgets with your banker, accountant and other financial advisers. The feedback can be valuable.

What Does Your Score Mean? Total your ratings for all nine processes and see what your score means below.

0–9: You have a lot of work ahead. Pick one or two processes and begin working on those.

10–18: You’re headed in the right direction, but still need to improve. Find one or two processes that you’re weak in and strive to improve those.

19–27: You’re doing a good job, but don’t rest on your laurels. Keep improving all of the processes and, if possible, find a few farmers who you can help with their financial scorecard.

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