Look beyond averages to make your budget work
Wonder how expenses get out of hand despite what appears to be good financial management?
According to Evan Shout, chief financial officer of a large Saskatchewan grain and oilseed farm and president and co-founder of Saskatoon-based business risk management and consulting firm Maverick Ag Ltd., effective spending management starts with looking beyond whole-farm averages.
Regular contact with financial advisors and peers – and being honest about financial stress – can also make a difference.
Look at evidence, not hopes
Talk about actual values rather than perceived or inflated values.
In Shout’s experience, conservatism is critical. Accounting for all expenses, including things like amortization (payments on capital purchases), is important. “People put down numbers they’re shooting for,” he says. He thinks it makes sense to use numbers achieved in the past.
Farms are a combination of two businesses – the farm itself and the real estate – but many farmers don’t adequately separate the two, Shout says. This makes it easier to overlook costs and gives a false sense of achievement. "If they start pulling out a number for rent, the actual equity of the farm drops,” he says. Separating farm costs from real estate costs will allow you to talk about actual values rather than perceived or inflated values.
Hidden personal expenses
Financial advisors are there to help your business succeed.
Many personal expenses can hide in the farm accounts. Sifting out utilities or vehicle costs gives a clearer indication of overall spending. Making this distinction is particularly important when moving off-farm.
Another common mistake is looking at the farm as one mass. Instead, Shout says, break down expenses and income by sector or potentially by quarter (or acre). Doing so can reveal certain crops or parts of the farm are not as profitable as initially thought.
“Say you want to grow high-yielding oats but need to get another piece of machinery to do it. This cost is spread over everything. However, if you didn’t grow that crop, you didn’t need that machinery. So that cost should be allocated to that one crop,” he says. “We tend to lie to ourselves. We average stuff.”
Communication and stress
Shout reiterates financial analysis can weigh heavy on the mind and encourages farmers to unburden themselves from “rugged individualism” – the idea one should stand or fall completely on their own and do so privately.
“Most large-scale farms are beyond this. They have peer groups, boards, outlets to voice concerns,” he says. “In agriculture, competitiveness has kept this down.”
Farmers can always look to advisors for help. Trusted financial advisors, for example, are there to help your business succeed, hopefully lowering stress in the process.
“Talk to them today,” Shout says. “Keep them in the loop so they know when you’re coming in. Makes their job easier and keeps them in tune to the business needs. Treat it as a relationship.”
From an AgriSuccess article by Matt McIntosh.
Advisors are an important part of any farm team. Here are some tips to help you find the right ones for your operation.
Can you count on decent profits in a good year? If not, farm finance experts say you might want to re-evaluate your expenses.