Using ratio analysis can make a big difference for your farm. Incorporating a ratio module within your accounting system, can help you pinpoint areas of strength, and weakness, to help you increase profits and reverse negative trends. Here's how.
Track Financial Condition
Ratio analysis allows you to see the data behind the indicators, and trend information can be shown in meaningful ways, such as a graph or chart for any number of years available. This helps you see your financial condition in a way that is meaningful to you, so you can start making improvements where necessary, or have the confidence to continue with your efforts as they are.
Compare Your Farm to Your Competition
Looking at the trends of your competitors can be of great value to your farm. Ratio calculations allow you to view industry standards and illustrate financial trends, so you understand where your farm stands against your competition. The success, progress, or shortfalls of your farm, can be understood and addressed, so proper action can be taken. By knowing where you stand against your competitors, you know where to improve, giving you a competitive advantage.
Compare Various Time Frames
Understanding your current situation is crucial. And yet it may be even more important to compare data from two different time frames. Perhaps the past year wasn′t profitable and you want to turn it around. Or maybe you want to understand why you were struggling so much last month. Use ratio analysis as a high-level tool to see trends over longer periods of time, so you can achieve long-term financial growth.
By using Ratio analysis, you can access information and trends that you may not have noticed, so you can make changes accordingly, which will benefit your farm!
This worksheet can be used as a guide to help your organization find the best farm software application for you. Consider each field of information and fill in the appropriate answer for your needs. Send this check list to accounting software vendors you are interested in, or simply use it as a guideline when talking to vendors.
Using accounting software to help manage your farm and its finances is a wise decision. Software can help you become more organized and profitable, and can also provide tools to manage taxes, write checks, enter payables and receivables, manage your general ledger, and so much more. But how does a farmer know when to switch from a basic accounting program to an agricultural-based program? Use this article to help you decide if it’s time to replace your general accounting software with agricultural-based accounting software. Here are signs it’s time to make the switch.
You are unsure of your farm’s financial future.
Entering data into a software system is beneficial because all of your financial information is organized in one place, and is easily accessible. A true agricultural accounting system can do more for you than just organize data. It can help you project future sales and create ‘what if’ scenarios for your farm, which can help you accurately plan for future business strategies. Some systems even include ratio analysis, which helps you calculate standard agricultural-specific ratios, and also understand trends. Knowing where your farming operation stands with ratios can help you address issues and become more profitable.
You don’t know your true crop and livestock costs.
Knowing the overall profitability of your farm is extremely helpful, but which of your enterprises are generating the most profits? The key to increasing profits is knowing where to focus, and an agricultural-based accounting system can help with this. Production analysis is a tool that provides detailed crop and livestock information on a cost per unit basis. With that information, you can see where changes need to be made, and make intelligent decisions on how to increase your profits. Another helpful tool is the ability to distribute complex transactions across multiple accounts and production units, rather than simply attributing the transactions to a single account. Multiple account distribution, which most basic software programs do not offer, can provide a more accurate financial picture for your farming operation.
People are requesting crucial information you cannot provide.
As your operation grows, it may become necessary to provide more detailed financial information about your farm to third parties such as bankers, landlords, managers, consultants, and others. Having the ability to track detailed information about each aspect of your farm, allows you to pull that information when you need it, making it easy to provide third parties the detailed information they require. A good agricultural-based system provides in-depth financial analysis with the ability to structure and segment entire operations, profit centers, accounts, and inventories to track data, combine entities, and receive relevant farm reporting
If any of the above signs ring true for you, it may be time to find agricultural-specific accounting software for your farm.
The plain and simple truth is that if you don’t track financial information by crop, farm, field, and land owner, you are just guessing whether you are making the right decisions regarding your farm. On the flip side, when you are tracking it, you can also do “what if” scenarios that open the pathways to making better business decisions. “What if” scenarios can help you:
- Compare the profitability of individual production years regardless of crop/livestock.
- Determine which products to continue producing by comparing the profit per acre/head of each crop/livestock.
- Determine if fields/livestock are not producing to their potential.
- View the break even cost/bushel for each field in a production year.
- View the profitability of a field regardless of which crop it raised over a period of time or determine if it is more profitable to raise feeder hogs or farrow to finish.
- Analyze and compare profitability between profit centers, farms, and production years or any other combination of business segments.
If you track inventory, it will provide you with more accurate profitability analysis. If you aren’t tracking inventory, then you can’t really do accrual accounting, so you just expense your supplies (seed, fertilizer, etc.) in the year you purchase it. But that might not be the same year that you use it, AND it may not be the same year you sell the crop. So you could have the expense in one year and the revenue in another year… thus throwing off profitability for each year.
You can decide how detailed you want to be with tracking crop production…
- Start really basic – just do production tracking by crop, farm or field, or a combination of crops & farms or by land owner.
- Once you are comfortable with that, you could expand the next year (or whenever you feel comfortable doing so) and start tracking inventory.
- Then once you are comfortable with that – you can start using WIP (Work In Process) accounts and doing accrual accounting (and getting more informative and meaningful financial reports).
Is your farm running less efficiently than you would like it to? Are you confused about what to do about it? Sometimes we are painfully aware that we have financial issues, yet we are too overwhelmed to know where to start. Running a farm is no different—there are so many things to think about in times of financial distress, that it’s hard to know where to start fixing things. That’s why it’s good to be able to run “what-if” scenarios
Creating “what-if” scenarios in your farm accounting software can help you project future sales, cash flow, income statements, and assets and liabilities. You can then in turn make good plans and decisions for your farm’s future.
Compare “what-if” budgets with actual and projected figures years into the future. Once you start tracking and running this information, your farm operation will begin to operate more profitably.