There was a time when parents would sit their children down and teach them how to balance a checkbook. It was a simple enough rite of passage but learning to keep track of what was coming in and going out of a personal bank account could set a young person up for financial success.
Nicolas Lindholm thinks that keeping an accurate accounting of a farm’s cash flow is an absolute essential for it to succeed. The owner and operator of Hackmatack Farm and Blue Hill Berry Company, both in Penobscot, Maine, Lindholm is also the organic marketing and business specialist for the Maine Organic Farmers and Gardeners Association (MOFGA).
“Meaningful data is needed to make meaningful decisions for your farm,” said Lindholm. “Good data may not always lead to good decisions, but it will certainly get you there more often than bad data.”
He stressed that while proper monitoring of cash flow is extremely important, it doesn’t necessarily have to be complicated. In fact, he promoted keeping things as simple as possible, and encouraged small farmers to focus on a few basic things.
- Income Statements – Also called profit and loss (P&L) statements, income statements “analyze what happened.” They are for looking back on a period of time at actual transactions that occurred and analyzing them for meaning (such as sales income, cost of goods sold, expenses, net profit or loss from operation and from other activities).
- Balance Sheets – Balance sheets “analyze what you have, what you owe and what you own at the moment.” These are also known as a business’s assets, liabilities and equity.
- Cash Flow Statements – These statements “analyze what happened” by looking back on a select period of time at actual transactions that occurred and evaluating them for meaning (cash coming in, cash going out).
Lindholm said that all of this can be done effectively with simple spreadsheets and a little effort. He also cautioned farmers to avoid a few more common mistakes.
“It’s easy to say ‘Well, at the end of the year I had more cash coming in than going out, so I’m fine.’ But you have to keep track of what kind of cash is coming in, and when it’s coming in,” he said. For example, cash from the sale of produce, which is replicable, shouldn’t be confused with revenues from farm grants, which are often one-time occurrences.
Also, monies coming from farm loans should not be confused with cash infusions that do not incur a liability that must be repaid in the future.
The timing of inputs matters as well, as many farms experience months of greater revenue as well as leaner periods of time. Careful recordkeeping of these cycles can help a farmer plan out their expenditures in a way that works best with their finances at any given time in the year.
For more information visit mofga.org.
by Enrico Villamaino