by Danielle Stephens, Head of Accounting and Finance
Farm operation management continues to become more and more complex. While success has traditionally been measured by increasing production, higher production does not always lead to higher profits or a higher net worth. Like any business, raising production (or providing additional services) requires additional input costs (building new facilities, purchasing additional equipment, hiring more employees, etc.). Other considerations include whether financing is necessary for expansion, the cost of financing (high vs. low interest rates), and whether the market can endure increased production (potentially leading to decreased commodity prices).
There is risk involved in the decision to increase production or maintain the status quo. However, managing farm finances has the greatest potential for adding profits and financial stability to the operation. Financial analysis may show increased profits for the increased production or analysis may show that the farmer would be financially better off maintaining the current production level. If the increased revenue received from additional production exceeds the costs necessary to increase production, the operator may have created a profitable situation. At the same time, opportunity costs must also be identified and analyzed.
In today’s farm economy, increased production and hard work cannot guarantee success. Keeping good records and constantly monitoring the financial condition and performance of the business is required. The key to agricultural success lies in identifying the highest sustainable output of resources; both natural and financial. The result is a maximized return on investment that you can count on for years to come.
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