What’s in this page?
During times of stress, it can be difficult to focus and make decisions. As you may have read in How Stress Affects Brain and Body, your ability to organize your thoughts is impacted by your body’s physical reaction to stress. To “take stock” is to think carefully and clearly understand a situation, so that you can decide what to do. Farmers who lament doing this may feel the outcome will be negative; however, you may have also read in Stress Management that the process of farm planning provides a roadmap that helps reduce confusion and ambiguity and thus reduces stress.. It may reveal options you may not have considered.
How do you start farm planning for your farm’s future? One way is to examine of your farm’s current situation.
Where is the farm now?
Clearly describing your farm as it stands now can help ensure all members of the farm are aware of all the aspects of the business. It puts all farm/family members ‘on the same page’ and can help agricultural service professionals see your business clearly. You hold a lot of knowledge of your business in your head, but writing down a brief history and description is helpful for all involved in the business.
There are a number of ways to begin describing your farm. You might want to start with the history of the farm, how you or your family came to own the property, and how the farm evolved and grew over time. A few questions may help get the discussion started:
- What is the history of the farm and family, including both off and on-farm children, their ages, and what they do for a living?
- Who is doing what? Who is making decisions (operational and strategic)?
- How are assets owned?
- How are income and expenses distributed?
Gather your financial information (balance sheets, income statements, Schedule F, retirement account information).You may have these financial statements in your files or through your own financial software program such as QuickBooks or AAIMS. If you work with a financial advisor, lender, accountant, or tax specialist, they may be able to provide these documents as well. A good set of financial records is important to defining your farm business. Once the financial documents are in place, making a few calculations and observations can help determine the financial status of the business.
Farm Financial Statements
The four major financial statements that are used to determine the financial position and performance of a farm business are:
- Farm Net Worth Statement (or Balance Sheet): Organizes what farm assets are owned and what debts or liabilities you have on the farm business assets. Based on these you can calculate the net worth or equity position at one point in time. You can learn more about organizing your balance sheet from the factsheet Understanding the Farm Business Balance Sheet, Part I. Once you have your balance sheet, this factsheet, Understanding the Farm Business Balance Sheet, Part II: Interpretation and Analysis, can help you analyze your balance sheet information.
- Farm Net Income Statement: Organizes the income and expenses of the operation and the net income over a period of time.. You can learn more about the farm income statement from the factsheet, Understanding the Farm Income Statement, Part I. To learn about accrual adjustments for the income statement, read this factsheet: Understanding the Farm Income Statement, Part II: Accrual Adjustments and Interpretation.
- Statement of Cash Flows: Organizes all the sources of cash and how it is used by the business during a year.
- Statement of Owner Equity: Calculates how net worth has changed from the beginning to the end of a year.
This factsheet, Understanding Profitability Using the Farm Business Balance Sheet and Income Statement, can help you evaluate your farm’s profitability with the information you’ve gathered from the Balance Sheets and Income Statements.
For help with financial and/or production records, you can contact your local Extension office or work with your lender. There are several pieces of information that you should gather before working with your lender, to discuss your financial position. An Extension agent or trusted lender can help with financial troubleshooting.
Calculating family living needs is an important part of a financial checkup. Putting pen to paper regarding your actual expenses over the past couple of months, can be eye opening for anyone.
UW-Extension offers a number of capacity building tools to make sound business decisions:
- Financial Management Factsheet series
Series of factsheets provide in-depth explanation of basic financial statements (balance sheet, income statement) and accrual adjustments to understand and determine farm profitability.
- Cost of Production & Enterprise Budget Tools for Grains, Forages, Dairy
The enterprise budget is a means to analyze the profitability of a particular enterprise. Basic spreadsheets for dairy, livestock, field crops, pasture, commercial and fresh market vegetables, allow a user to view an example budget, and/or enter their own farm numbers.
- Agricultural Leasing
Factsheets and example contracts help landowners and operators learn about lease arrangements and includes sample written lease arrangements for several alternatives.
- Pricing Standing Hay and Corn Silage
Factsheets and tools provide a framework for a buyer and seller to negotiate a price for various forages. The methods described can help buyer and seller determine what price range they should try to achieve for their particular situation.
- WI Custom Rate Guide 2017
The Custom Rate Guide is a summary from a mail survey which collected rates paid by Wisconsin farmers who hired custom work, custom operators and farmers who performed custom work, and machinery dealers who rented out equipment for field operations including manure services, tillage, planting, fertilizer & chemical application, harvest operations, and machinery rental.
Once you have taken stock of your current farm business, it is possible to review options for your future. Re-evaluating your current enterprise may reveal opportunities to enhance cash flow, or alternatives to maintain the farm assets that are most important to you and your family. This may mean selling or renting some assets, and keeping the farm in the family.
Where do you want to be?
How do you define the future of the farm, and how well can you articulate this to others in your family, and/or business? You may find that others involved with the business may or may not share the same ideas for the future of the business. There are resources to help you articulate your vision for the future and communicate that vision with those involved with the business and/or family, start by developing your vision for your farm & for your future
There are many anticipated reasons to make changes to your business (such as retirement), as well as unexpected reasons (financial hardship, injury, disability). If you start planning today for what tomorrow may bring, you can have a successful transfer. Success may mean the succession of the business to an heir, selling your business to generate retirement income.
It is never too late to start working on your farm transition plan, nor too soon. Start by evaluating your values and skills, and assess your strengths, weaknesses, and opportunities and threats (SWOT analysis). Make a timeline to implement your plan and develop a schedule so you know when things need to take place.
There are many considerations within the financial arena. If the farm business is showing a trend of lower profitability then it may be time for exit strategies. If working capital is trending lower, it may be due to covering family living, basic replacement, maintenance and/or debt service from this reserve of capital. Ultimately, it could be an erosion of equity and in the least a loss of a risk management tool. Exit may be a more financially sound alternative.
Alternative Agriculture Production & Marketing
On the road map for a farm’s future, before reaching the destination of alternative production or marketing, one must first consider the viability of the alternative, particularly how well it will fit with the current farm business.
It is important to evaluate all aspects of a given enterprise before you commit your time and money. Whether you are a full-time farmer looking to diversify or a part-time farmer looking to generate additional income from your property, there are many important issues to consider when selecting a new or alternative enterprise.
In addition to learning about production practices and marketing, it is important to consider managing additional risks specific to the enterprise of interest, which may include types of insurance, legal and/or licensing requirements, storage and different cycles in terms of return on investment.