3 Key Numbers That Explain Financial Health – Ag Matters

As the old saying goes, "the numbers don't lie.  Is your operation truly in the black?  Have you factored in living expenses and your own labor?  Cornell Cooperative Extension suggests looking at these three important numbers.

Every farm needs to know three key numbers to determine if they are heading for financial trouble.

1. Cost of Production

Whether your milking a herd, growing fruits and vegetables or raising stock, do you know the actual cost of what you produce? It's a must to include living expenses and machinery.

Calculating a short-term cost will tell you if you are able to pay your bills and cash flow your business. The long-term cost calculations will help you understand if you are generating enough profit to offset the depreciated value of your machinery and equipment.

2. Return on Equity

Is your investment in land, machinery production costs and labor generating a profit?

If that profit becomes negative—your losing money and you have to draw down living expenses or contribute non-farm income to the business than you are bleeding equity.

This will provide some insight into what expenses you can control and and show some places you can cut costs.

3. Accrual Income Statement

While many think your income tax return is some indication of the profit or loss of operation, it doesn't detail several things that effect your true net worth.

it does not reflect the values for adjustment to inventories, what bills are unpaid, what dollars are due us, and has no reflection of family living expenses

Knowing these three key numbers can help you make important decisions.  Seek help if crunching numbers isn't your thing.  Talk with your tax preparer or a financial advisor.  You can also get assistance from CCE.
SOURCE:  Cornell Cooperative Extension - Bonnie Collins
Darren Frye, CEO at Water Street Solutions, a consulting firm in Peoria, Ill.