Understanding your farm’s financial health- Part 1: The soil test analogy | Michigan Farm News

Understanding your farm’s financial health- Part 1: The soil test analogy

Category: Crops

by Jon LaPorte, MSUE Educator/Farm News Media

MSU-Part1_MFN_8.7.18
Just like a soil test, knowing the financial situation provides knowledge about where efficiencies already exist and, more importantly where improvement is needed.

As strange as that might sound, understanding your farm’s financial health is the key to you successfully meeting your farm goals.

Financial health is not normally the topic of conversation at informational meetings about successful farming. Typically the focus is on achieving better production, marketing for higher prices or lowering expenses.

But without understanding what your financial health is and how it influences production, how do you know what improvements to make or market prices you need to be successful?

We know that the results of a soil test can tell us a lot about our farm, from available nutrients to soil structure and even overall soil condition. We use this information in shaping fertilizer programs, chemical uses, irrigation scheduling and even yield goals.

But soil test also help us to discover unknown problems or challenges that may be holding back or limiting success. If a soil test reveals that the pH has a lime index of 67 and a pH of 5.9, for example, and the producer knows they need a 6.5 pH level, they can apply 2.5 tons of lime to achieve the desired 6.5 pH.

Because the farm was aware of the challenge, the right solutions were found and implemented to overcome them. Put another way, the soil test provided vital information to help make a decision that will impact the farm throughout the year.

The same concept applies to understanding your farm’s financial health and can provide tremendous insight in the decision-making process. Financial health is a measure of the farm’s financial situation, which describes how profitable and productive the business currently is.

As margins get tighter, managers know that they have to do more with less and become more efficient in order to survive. Just like a soil test, knowing the financial situation provides knowledge about where efficiencies already exist and, more importantly where improvement is needed.

The questions asked when considering a soil test are very similar when considering the farm’s financial health. The answers to these questions give us a foundation and a starting point that we can plan from.

  1. How much do we have to work with already?
  2. Do we have any available assets that can be helpful?
  3. How much do we need to add to our plans to reach our goal?

When considering your farm’s financial health, think about what your farm currently has to work with. Do you know how efficient the farm is? What available assets are you using or not using towards those farm goals? What areas could improvements be made?

Keep these ideas in mind as we dive further into the value of understanding the farm’s financial health in the next part of our series. There we will focus on collecting the core samples needed for a "financial" soil test to help us better answer those questions.

This is the first of a four-part series on farm financial health.