Investment decisions must be based on data, not hope

We go to trade shows across Western Canada throughout the year, and most recently attended Canada’s Farm Progress Show in Regina.


We typically have a booth at the shows and look to talk to farmers and farm families about the opportunities, successes and challenges they experience in managing their businesses. 


It can be tricky to get farmers to stop and talk. There’s a lot to take in at the shows and not that much time. In fact, a general comment we hear is that farmers don’t have enough time to get to all the exhibits and presentations that they would like to visit. 


As well, every other exhibitor is trying to do the same thing — get some of their time. 


So, what to do? Well, we have a draw for a prize, as do many, if not the majority, of exhibitors.


We use the draw as a way to get them to stop at our booth for a few minutes while they fill out an entry. It lets us engage them in a discussion as a first step in getting to know them. 


The entry includes information that we can use to contact them after the show. We ask them to check any one of four management challenges that have caused them stress during the current year. 


It’s completely optional. Many read through the challenges and decide not to check any of the boxes, which is fine. 


However, there are quite a few who do.


One of the management challenges listed is, “not knowing how well my farm is doing financially.” 


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I’ve talked to farmers about financial management for many years. As well, I lecture on the topic at the University of Manitoba’s agriculture department and deliver workshops whenever I’m given the opportunity. 


I have observed over the years that many things have changed when it comes to financial management. 


Land and equipment values are way higher, and with that, many farms are carrying significantly more debt. 


Some things reflect less change, such as profit margins. They can still be very small or non-existent at times. 


As well, a lot of farmers still don’t know how well their farms are performing financially. 


Given the large capital investment required, and especially where a farm has considerable debt, not knowing how well the farm is doing financially must be really unsettling at times. 


Too many farmers make decisions about financial investment and take on additional debt on the hope that things will work out over time. They often do, but there’s the chance that they won’t. “Hope” is not a good foundation for strategy. Decisions should be made knowing where things are at financially.


Financial management can be a very broad topic. I’m going to focus my comments here on balance sheets and net worth statements. 


Both include assets and liabilities, and the difference between them on a balance sheet is referred to as retained earnings. For net worth statements, the difference is known as equity. 


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Assets are what you own; liabilities are what you owe. Equity (or retained earnings) is what’s yours. Assets on a balance sheet are recorded at original cost. On a net worth statement, they’re recorded at fair market value.


Both are a snapshot in time. They represent a farm’s financial position at the date of completion, which is typically once a year but could be quarterly, monthly or for that matter, every day. 


The year-over-year change — increase or decrease — in retained earnings (balance sheet) is primarily a function of earnings for the year. This is earned financial progress. 


Year-over-year change in equity (net worth statement) is a function of earnings and increases in the value of assets such as land and quota. 


Farmers particularly need to know how much of their financial progress comes from earnings. This is extremely important. 


The only sustainable source of cash is profit. 


This is only one very small part of financial management. If you don’t know how your farm is doing financially, find someone to help you. It will give you peace of mind. 


It could reinforce that things are fine. And then again, it could identify a problem area that requires attention. 


I often will talk to farmers who are quite capable of analyzing their farm’s financial performance on their own but like to get a “second opinion.” 


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Whatever your situation, you need to know. There’s a saying that “cash is king.” When it comes to financial management, it could be argued that “information is king.”