Like any other entrepreneur, you chose to farm because it combines your skill and your passion. And, like most, doing the work is more pleasurable than managing the enterprise, but being unaware of key financial metrics in real-time carries a risk. Understanding how your operation makes a profit, and understanding what issues contribute to its challenges, are powerful tools to help your operation grow and prosper.
Here are some reminders about the key metrics you might find helpful.
KNOW THE BIG 3:
- Profitability – the difference between income and expenses.
- Liquidity – the ability of your operation to meet cash obligations within a specific time period. Farms with good liquidity typically have ratios of 3.0 or higher.
- Solvency – the ability of the farm business to secure debt or withstand adverse conditions.
Once you define and separate these areas, you can use them to identify your strengths and weaknesses.
Source: Alejandro Plastina, “Financial Performance Measures for Iowa Farms,” ISU Extension and Outreach - Ag Decision Maker, www.extension.iastate.edu/agdm/wholefarm/html/c3-55.html
Member FDIC
