A key factor to success in agribusiness is a keen understanding of your farm’s financial position. This includes knowing what assets the farm owns, who is owed what, and most importantly, how much cash is in the bank.
This information is crucial for making sound financial decisions.
As a producer, you are subject to challenges outside of your control, such as weather, product demand, and international trade agreements.
The nature of agribusiness also requires a heavy application of inputs early in the season while potential returns depend upon the coming harvest. No producer can accurately predict the outcome of the harvest at the beginning of the season.
In addition, prices for commodity products are set by the market, which can affect your profit margin and leave you exposed to the risk of uncontrolled and unexpected costs.
The difference between success and failure can depend on your understanding of your farm’s financial performance.
In effect, every dollar that is saved during production equates to a $1 increase in the profit margin. Therefore, performance management is key. By accurately tracking production costs, you will be able to recognize and adjust input costs that threaten profitability.
In a sense, a functional performance management system is the producer’s gateway to improved profitability.
Performance management involves the collection, interpretation and application of operational information in a timely and effective manner.
A properly functioning performance management system helps you manage risk exposure, make reliable production forecasts and control costs.
Managing your performance can be as simple as developing a budget that allows you to track important market and operational information in a practical and efficient manner.
A budget not only directs your attention to various cashflow and expense areas, but also provides a benchmark against which to evaluate your operation throughout the year. This will enable you to target and address potential operational concerns as they arise.
In terms of financial management, careful and accurate bookkeeping practices will ensure reliable accounting records and valuable tax information, as well as provide insights into the profitability of your operation and its financial stability.
Several software systems have been developed that interface with your smartphone. These programs will allow you to compile, interpret and respond to production data.
There is no set formula for how the system should be developed and how complex it must be. Essentially, it needs to be enough to provide you with useful and timely information for decision making.
What you must determine as a producer is the most suitable solution to meet your requirements. By choosing the correct platform, you avoid not only an ineffective management system, but also unnecessary expenditure. The extent to which you implement it, will depend on the nature of your farm.
Colin Miller is a chartered accountant and partner with KPMG’s tax practice in Lethbridge. Contact: email@example.com. He would like to thank Richard Reimer and Travis Dow of KPMG for their assistance with writing this article.