A New Year’s Farm Management Checklist Jeffrey Hyde Associate Professor of Agricultural Economics January 8, 2007 For many, the New Year often brings many resolutions, most of which fall by the wayside pretty quickly. So, rather than suggest some revolutionary resolutions, I thought I’d point out a few simple areas to address as a checklist for the upcoming year. Spending some time on these points, particularly while farm operations may be slow, will help to improve your farm’s performance for 2007 and beyond. Enter Your Records – You probably kept track of your income and expenses as well as production inputs used and your yields. If you have a record keeping system, either computerized or other, take some time to move the individual records to that system. Without records, you can not assess your business’s financial condition, measure enterprise profitability, or prepare tax returns. Entering your records is a vital step in the management process. Analyze Your Records – Once you have your records, take some time to see if your enterprises (such as milk, hay, corn, strawberries, or peach preserves) were profitable. If they weren’t can you explain why? Was the whole farm profitable? If not, why? If so, what made you successful? You’ll want to do that again if you can. You can also determine if your net worth increased by looking at your balance sheet for 2006. Again, none of this can be done without good records. Select Your Enterprises – To do this, you’ll need enterprise budgets, which provide best guesses of costs and returns associated with each enterprise. For enterprises you’ve produced before, start with your records of costs and returns. Adjust those based on your best estimates for prices and quantities for the coming season. For new enterprises, you can start from scratch or from a published budget (many of which are available online). Again, you’ll need to adjust for local conditions and expectations for the new season. Once you have budgets, choose enterprises based on three criteria. First, how much profit can you expect from each one? Second, how risky is the enterprise? Diversification can help to address market and production risks. Third, production considerations, including crop rotations, are important in making your selections. Set Goals for 2007 – Because most farms are clearly family businesses, I encourage you to set three different types of goals. Personal goals are those things that you hope to achieve this year. Family goals relate to those things that your family hopes to achieve this year. Finally, business goals relate issues such as farm profitability including production, marketing, and financial management. Think about what you hope to achieve this year and note those things. Maybe use 2006 as a benchmark. For example, a reasonable goal is to increase farm profits by 10% over 2006. Manage Your Risks – A farmer faces many, many risks. I’ll briefly talk about five types of risks. • Production risks are those that may impact the amount or quality of your farm’s output. These can be managed by production practices, crop insurance, and maybe new production technologies. • Price risks are related to input and output prices. You can manage these with contracting, including the futures and options markets. • Financial risks can impact your ability to obtain and pay back debt. You can manage these risks by closely managing your cash flows. An important aspect of this is making sure that you have cash reserves and access to debt capital if needed. • Legal risks leave you open to lawsuits; particularly important for food processors and agri-tourism operators, for example. Insurances are the most obvious methods available to manage these sorts of risks. However, sound production practices that keep food safe throughout the production process are also important. • Personal risks relate to the likelihood of someone getting hurt, sick, or worse. You can manage this through insurances (for example, life and key man). Also, make sure that your employees are fully trained to perform their required tasks. Additionally, make sure that you have backup help in case of a loss of a person. You can accomplish this by training others to do the work of the affected person. This is called cross-training. Make Capital Purchase Decisions – Take time to think about buildings, machinery, or livestock that you need to achieve your established goals. You can use tools such as capital budgeting to assess if a given purchase will be profitable. You may have heard of concepts such as “net present value” or “payback period.” These can be calculated from a capital budget. In addition to profitability, you must also assess an investment’s cash flows. Will the cash generated be enough to cover expenses including production costs and principal and interest? Keep Learning – Take advantage of professional development opportunities that tend to occur in the winter months. Learn what you can about business planning, financial management, the latest research that may affect you, and any relevant emerging production technologies. To learn more about these opportunities, contact your County Extension Office. Take Some Time Off – Whether you actually travel away from the farm, take some time to spend with your family and friends. This socialization allows you to recharge your battery; to think about why you run a farm business. Most happy farmers I know take time away at some point. You may have done this over the Holiday season. If not, schedule a weekend away if you can at all afford to do it. Note that this applies to any employees you may have, also. As you can see, nothing on the list is too radical. But they are very important aspects of management. Take time to manage this winter before the urgent gets in the way of the important.