Farm Goals Need Numbers

A goal becomes useful when you know what the farm must earn, retain and invest to achieve it.

When I ask farming families about their long-term goals, I often hear similar answers.

“We want the farm to be more profitable.”

“We would like to buy more land.”

“We want to reduce debt.”

“We want to create a secure future for the next generation.”

These are worthwhile ambitions. But there is an important question sitting behind each one:

What does the farm business need to achieve financially to make it possible?

Most farm families know where they would like to end up. Fewer have put clear numbers around what it will take to get there.

That is where a goal starts becoming a plan.

Step 1: Put a Number on the Goal

A broad ambition gives the family direction. A number makes it something the business can work towards.

For example:

• How much debt needs to be repaid, and by when?

• How much cash would be needed to contribute towards another farm?

• What level of annual income will the family require?

• What would it cost to employ additional labour and create more time away from the farm?

• How much cash should the business retain each year for machinery replacement, debt reduction and future opportunities?

“Grow the farm” is an ambition.

“Build enough borrowing capacity and cash reserves to purchase another 400 hectares within five years” is a goal the family can plan for and measure.

The purpose is not to predict the future perfectly. It is to make the destination easier to understand.

Step 2: Understand What the Farm Is Producing Today

Once the goal is clear, the next step is to understand the farm’s current earning and cash-generating capacity.

A profit-and-loss report is part of that assessment, but it does not tell the whole story.

The business also needs to understand:

• The value of what the farm produced

• The direct cost of producing it

• The Gross Margin remaining from production

• The Overheads required to run the business

• The Operating Surplus generated from normal farming operations

• Interest, tax and loan commitments

• Family wages and drawings

• Machinery, land and infrastructure spending

• The cash remaining after everything has been paid

This is where turnover can be misleading.

A farm can sell a lot of grain, livestock or wool and still retain very little cash after production costs, Overheads, finance commitments, family requirements and farm investments are included.

The bank balance can also give the wrong impression. A strong balance today may reflect unsold grain, delayed bills, additional borrowings or the timing of livestock sales rather than underlying profitability.

The important question is not simply:

How much money came in?

It is:

How much did the farm earn, and how much of that was retained?

Step 3: Find the Gap

The next step is to compare what the farm is currently achieving with what the family’s goals require.

That difference is the gap the business needs to close.

The gap may be in:

• Profitability

• Cash generation

• Debt-servicing capacity

• Working capital

• Return from a particular enterprise

• Labour capacity

• Machinery capacity

• The amount the family expects the farm to provide

This can be uncomfortable, but it is also useful.

It may show that the goal is achievable but will take longer than expected.

It may show that the business needs to produce a larger annual surplus before taking on more debt.

It may reveal that the farm is profitable, but too much cash is leaving through machinery purchases, loan repayments or family withdrawals.

It may also confirm that the business is in a stronger position than the family realised.

Either way, the discussion is now based on evidence rather than assumption.

Step 4: Decide What Matters Most

Once the gap is understood, the temptation is to create a long list of things that could be improved.

That rarely helps.

Farm businesses do not become stronger by trying to change everything at once. They improve by identifying the small number of decisions likely to make the greatest difference.

Depending on the business, those priorities might include:

• Improving the Gross Margin from a major enterprise

• Reviewing whether additional inputs are producing enough value

• Reducing an Overhead that has grown faster than income

• Changing the timing of grain or livestock sales

• Building more working capital

• Slowing machinery spending

• Reviewing family cash requirements

• Reducing debt

• Improving financial reporting and forecasting

The numbers help separate the important issues from the background noise.

That allows management time, cash and attention to be directed towards the decisions that matter most.

Step 5: Build a Plan–and Keep the Forecast Current

A financial Plan sets out what the farm is aiming to achieve during the coming season or year.

It brings together expected production, prices, income, costs, family requirements, debt commitments and proposed farm investments.

The Plan becomes the financial expression of the family’s decisions.

But conditions change.

Rainfall changes. Yields change. Livestock weights change. Prices move. Costs increase. Machinery breaks down. Opportunities arise.

That is why the farm also needs a Forecast.

The Plan describes the intended outcome.

The Forecast uses the information available today to show where the business is now likely to finish.

The difference matters.

A Plan might assume a wheat yield of 4.5 tonnes per hectare. By September, seasonal conditions may suggest something different. Updating the Forecast shows the likely effect on income, cash flow and the year-end bank position while there is still time to respond.

Forecasting does not remove uncertainty.

It provides earlier warning.

Step 6: Test Farm Investments Before Committing

Improving cash flow does not always mean cutting costs.

It does not mean starving the farm of productive inputs, keeping machinery beyond its useful life or avoiding sensible investment.

The question is whether the spending is likely to leave the farm business stronger.

Before buying land, machinery, livestock, technology or infrastructure, consider:

• What financial benefit should this investment produce?

• How long will that benefit take to appear?

• What cash will be required before the investment produces a return?

• Will additional debt place pressure on the business?

• What happens if production, prices or seasonal conditions fall short?

• What other opportunities will the business give up by committing the money here?

A worthwhile investment should do more than add assets or make the farm larger.

It should improve productivity, profitability, resilience or the choices available to the family.

Review Early Enough to Make a Difference

Financial management should not be left until the accounts are prepared at the end of the year.

By then, the season has passed and many of the important decisions have already been made.

A practical review rhythm might include:

• Regular checks of cash, upcoming commitments and the bank position

• Quarterly comparisons between actual results and the Plan

• Updated Forecasts when seasons, prices or production expectations change

• A full review after harvest, livestock turn-off or year-end

The purpose is not to produce more reports.

It is to answer three practical questions:

Are we on track?

What has changed?

What do we need to do differently?

The Bottom Line

Farmers cannot control the weather, commodity markets or every input price.

But they can understand what the business needs to achieve, monitor whether it is getting there and adjust early when the result begins moving in the wrong direction.

That is the purpose of farm financial management.

• Understand where the business stands.

• Decide what matters most.

• Build a stronger future with clear numbers behind the decisions.

AF Consulting helps family farms understand the business behind the farming and turn financial information into better decisions.

To discuss what your farm needs to achieve, call or email me, Robert, at AF Consulting.