COLUMN: Need to look back before continuing forward
As this year winds down, it might be tempting to just "square up the books" and get ready for another round next year. In fact, many of you have already invested money toward the 2015 crop with early purchases of seed, fertilizer or chemical. Bef...
As this year winds down, it might be tempting to just "square up the books" and get ready for another round next year. In fact, many of you have already invested money toward the 2015 crop with early purchases of seed, fertilizer or chemical. Before moving on, I think it is important to invest some time analyzing the 2014 production cycle in order to improve future profitability and/or efficiencies.
The first place to review is the commodity market, which produced record-high livestock prices along with a sharp drop in grain and oilseed prices. Given the volatility in markets during just one production cycle, developing a sound risk management plan has never been more important.
One of the key features of the farm management program is to help producers develop good records with the ultimate goal of maintaining a financially-sound business. There are a variety of tools to track income and expenses plus capital purchases, which is the starting point of completing an analysis of the whole farm. Most farms operate on a cash basis, which is also commonly used to file income taxes, however, those numbers do not reflect the true profitability of the farm. A better picture emerges of the farm's actual performance after making the needed changes to an accrual basis. Fortunately, the adjustments do not entail complex formulas, but are easily computed from good farm records. It is usually best to compile at least three years of analysis to establish trends, especially given the unpredictable weather events which can have a dramatic effect on production.
In addition to analyzing the whole farm profitability, the next step of our program is to identify the profit centers of the farm and track the income and expenses within those areas. The profit centers will vary greatly from farm to farm but the main objective is to have each enterprise generate profits for the benefit of the entire operation. The last phase of farm management involves compiling field records and/or tracking specific groups of livestock within each profit center. This represents the "icing on the cake," as it should pinpoint which endeavors were profitable and which were not. I find that this information provides the best tool for deciding if any adjustments are needed before moving forward with the next production cycle. If this all seems overwhelming, keep in mind that developing an in-depth tracking system doesn't happen overnight but requires a little time and patience. Updating the numbers every year also gets easier once the initial system is in place.
As this year draws to a close, it is an excellent time to consider enrolling in our program as we are recruiting new students for 2015. If you would like additional information on this topic, please contact Kathy Meland, S.D. Center Farm/Ranch Management, at (605) 299-6760 or check out our website at www.sdcfrm.com .