Program on Agriculture and Small Business Finance

Financial Management in Agriculture

 
The use of sound financial management practices in agriculture is quickly becoming necessary for survival and are a required for outstanding economic performance.  We developed a research program to determine how widely farmers had adopted various financial management practices and whether these practices had any impact on farm profitability.  Not surprisingly, we found that many simple financial management practices had a strong relationship to farm financial performance. Among other things we found that farmers who took the time to prepare a written or computerized cash flow analysis of their investment projects were much more profitable than their peers who either did not conduct the analysis or those that “did it the analysis in their head”.  Check out our financial management scorecard to see how you or your borrowers stack up. 

 The research bulletin summarizing the entire study is available for download.  Written copies are available for a nominal fee.  These results have also been published in the Agricultural Finance Review,

Practice	Points for Practice	Your Points
Annually prepare accrual adjusted income statement	10
Conduct benchmarking or trend analysis	10
Use profitability measure as the primary performance indicator	10
Conduct economic profitability analysis for investments (payback, net present value, etc.)	10
Conduct cash flow analysis for investments	10
Evaluate investments with written or spreadsheet calculations	10
Do not routinely use dealer credit	10
Compare interest rates (and services) when borrowing significant amounts or lending relationship changes	5
Calculate the effect of fees, patronage dividends, stock on effective interest rates	5
Calculate the effect of cash discounts foregone on operating input purchases	5
Use discounted cash flows to evaluate capital leases	5
Periodically get more than one quote on major input purchases	6
Frequently involve manufacturer representative or consultant, and not just the local dealer and salesman, as source of information on inputs	4
	Total 100

Over 75 = excellent, 60 - 75 = average, below 60 = poor

Gloy, B.A., E.L. LaDue, and K. Youngblood.  “Financial Management Practices of New York Dairy Farms.”  Research Bulletin 9(2002).  32 pages.  Department of Applied Economics and Management, Cornell University. 

 Gloy, B.A. and E.L. LaDue.  “Financial Management Practices and Farm Profitability.”  Agricultural Finance Review, 63:2(Fall 2003):157-174. 

 Gloy, B.A., J. Hyde, and E.L. LaDue.  “Dairy Farm Management and Long-Term Farm Financial Performance.”  Agricultural and Resource Economics Review, 31:2(2002):233-247. 

 Gloy, B.A. L.W. Tauer, and W. Knoblauch.  “Profitability of Grazing Versus Mechanical Forage Harvesting on New York Dairy Farms.”  Journal of Dairy Science, 85:9(2002):2215-2222.   

 LaDue, E.L., B.A. Gloy, and K. Youngblood.  “Sound Financial Practices Doubled their Bottom Line.”  Hoard’s Dairyman, 148(April 10, 2003):268.

 LaDue, E.L., B.A. Gloy, and K. Youngblood.  “Can You Get More Bang for Your Buck?”  Hoard’s Dairyman, 148(April 25, 2003):310. 

 LaDue, E.L., B.A. Gloy, and K.Youngblood. “What do Farmers Say About Their Lender?”  Ag Lender, 7:1(January 2003):12.  

 LaDue, E.L., B.A. Gloy and K. Youngblood.  “Beyond the Balance Sheet:  The Characteristics of Superior Financial Managers.”  Ag Lender, 7:12(December 2003):8-10.

 Gloy, B.A. and E.L. LaDue.  “Financial Management Practices and Farm Profitability.”  In Financing Agriculture and Rural America:  Issues of Policy, Structure, and Technical Change, Proceedings of the NC-221 Committee Annual Meeting.  Editor M.A. Diersen.  Economics Pamphlet 1(2003):93-111, Economics Department South Dakota State University.