I was driving back to Omaha today, letting my mind wander about possible blog topics and it hit me: we have not yet discussed the necessity of financial recordkeeping. Most people do not find the work of managing finances all that exciting but without it, you will have no idea whether your operation is profitable, where you can grow your operation or, even more basically, apply for loans or other financial products.
What is involved in recordkeeping?
- You must know the cost of your inputs, such as seed, fertilizer, or hay. This allows you to project your costs and know the amount you must recoup to break even. Also calculate any lease payments, the cost of maintenance on machinery, fuel, insurance premiums, and any other expenses related to your operation.
- Know the market history for your commodities. How many bushels of corn can you realistically produce and what is the price per bushel? How many cattle do you have, what weight do you wish to sell them, how long does it take to get to that weight, and what is the market price?
- Know the details of your loans. What are the interest rates, what is the term (number of years to payoff), what is the principal balance.
- Know the cost of your own labor — how much time are you willing to expend on certain products and is the time worth the return?
- Know your family expenses — how much income do you need, both on-farm and off-farm, to live the lifestyle you want?
With the above knowledge, you can make both short-term and long-term plans for your operation. You can also calculate your balance statement (or net worth statement). Such documentation is typically required when applying for loans. If you have the information readily available, it will expedite the loan application process.
Later this week, we will discuss some of the other information you can glean from your records. But first, you must have the records! If you need any help beginning the process of recordkeeping, contact us! We’re happy to help.