By: Craig Macfie
In my career as a farm CPA and CFO I’ve noticed some recurring themes. Balance sheets and consolidation are increasing, debt servicing and cashflow are top issues, and assets and growth are becoming more expensive.
Typically, advisors, consultants and fractional CFOs are engaged at the top of what I refer to as the pyramid of farm financial building blocks when the farm is in the stage of financing acquisitions or growth, or in some cases for refinancing.
Sometimes this is too late and opportunities are missed. Other times it just takes longer than it needs to because the right base of people and financial processes hasn’t been built up.
There are reasons. Farm or land sales never seem to happen at an opportune time. And everyone is short-staffed, including farm owners who wear so many hats. Also, bigger dollars means more time-consuming due diligence.
Fortunately, it’s never too late to start assembling the financial building blocks, ready for the next opportunity.
Strategy & risk management
You’d be ill-advised to start a new farm business venture without a well-thought out or written-down plan. Financial institutions will require it. How will the debt be repaid? What are the main risks, and how will you mitigate them? Farm owners should consider the due diligence procedures employed by financial institutions before they invest in a new enterprise. These are best practices for a reason. One of my first questions with new fractional CFO clients is, where does the business want to go? Few operations have formal strategic or risk management plans.
Admin & bookkeeping
Soon bills will need to be paid for your new business venture. Office administration and bookkeeping work has begun. Sometimes the same person fulfils the admin and bookkeeping role, but not always. Admin work, such as paying the bills and organizing the receipts, can be separated with bookkeeping roles like reconciling bank accounts.
Admin and bookkeeping tasks should be scheduled and systemized. It’s important to stay up to date. James Clear, the writer of Atomic Habits, writes, “You don’t rise to the level of your goals, you fall to the level of your systems.”
Regardless, if the admin and bookkeeping roles are the same person, a good base needs to be developed for accountants to produce accurate financial reporting and tax filing.
Financial reporting & compliance (tax) filing
With strong admin and bookkeeping people and processes in place, financial reporting and tax filing becomes more efficient. Accounting firms can get backed up in the busy winter months, and bookkeeping issues can compound and add to delays. But with a strong bookkeeping and admin function, advisors and farm owners will have more accurate and timely information to make decisions.
On smaller operations, financial reporting is driven by cash basis reporting and tax filing. But as farm size grows and there are bigger investments in production, management reporting grows more important. You manage what you measure, and up-to-date, profit centre-level reporting is possible with the right plan in place.
Financial planning & analysis
With more accurate and timely financial reporting, financial planning and analysis becomes more effective.
Why forecast financials if we can’t forecast the weather? “All models are wrong, but some are useful,” says British statistician George Box. Decisions still need to be made. They are made using a mix of data and gut feelings but with better data, we make better informed decisions.
Effective financial planning and analysis helps you define the question you are trying to answer, such as, will I have enough cash? How will this affect bank covenants? Does this bring us closer to our goal? Three-statement financial modelling provides a complete financial picture to aid future decision-making.
Growth & financing
With the right base of financial building blocks, growth becomes more achievable. Farms have been consolidating since the beginning. Aside from niche or hobby farm operations, this trend is likely to continue. Having the right building blocks in place provides lenders or equity investors with the data they need to assess your opportunity. Operations which have an effective strategic and risk management plan in place, along with up-to-date financial reporting and dynamic financial forecasts, are at an advantage.
Start putting the right financial building blocks in place now to set your operation up for future growth and opportunities.
This article originally appeared in the November 2024 issue of Country Guide.
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