Harvesting Profits, the Role of Financial Literacy in Agriculture

Harvesting Profits, the Role of Financial Literacy in Agriculture

Author: Josh Tresemer, Vice President, Agribusiness Banking

Financial literacy refers to the knowledge an individual has about managing the monetary aspects of a business. While commonly understood by accountants and CFOs, key financial principles can be overlooked in agriculture, where farmers, ranchers and managers are often busy with the day-to-day tasks of running their operations.

However, numbers are very powerful, making financial literacy a key element in producing successful outcomes in ag operations. Detailed and accurate financial statements greatly assist managers in analyzing their operations in multiple ways, which can help achieve success. In fact, research from the National Institute of Food and Agriculture shows that improving financial literacy can increase farm profitability and growth.  

To equip ag leaders with essential financial literacy skills, it’s important to first understand what the concepts entail.

Understanding Vital Financial Concepts in Agriculture

Financial literacy beyond production ability is very powerful. Producers need to track trends in operational performance, global markets and input costs to name a few. In a commodity-driven business that has external risks such as weather, geopolitics and interest rates, a firm understanding of liquidity and leverage is important. 

Ag businesses that can withstand these risks generally have strong cash and working capital positions. With more liquidity built into your operation, you can adapt more quickly to market changes and withstand inevitable downturns more easily. On the flip side, too much leverage in an ag operation stresses debt repayment and restricts growth.

Expense analysis is another area where farmers and agribusiness owners, who are rarely accountants, need financial skills. In agriculture, it isn’t uncommon to over-emphasize top-line revenue and sale prices versus taking a holistic approach analyzing what will contribute to net income and cash flow. 

While it may seem attractive to “wait for a better price” or “capture the high,” it may not always be the best decision when considering the cost of carrying inventory for a longer time.

Ag operators should be conscientious of unit costs (per bushel/head/equipment hour/acre) and carrying costs (interest, storage, yardage, rent equivalent) when making marketing and purchasing decisions for their operation. 

Taxes provide another example of when financial intricacies come into play. Often, ag producers use cash-basis accounting methods to reduce taxes in the short-run. This works by deferring revenue, pre-paying expenses or accelerating depreciation.

In some situations, it may make sense to limit your annual tax liability, but there are other scenarios when it is more beneficial to show a profit to demonstrate the operation is generating cash. A strong accountant can help identify long-term goals and assist with tax planning.

When making financial decisions like these, it’s important for owners or managers of ag operations to consider the big picture. And that’s the crux of financial literacy. It isn’t always about understanding the intricacies of finance but about knowing enough to understand when you’re taking the right approach to meet your business objectives. And knowing where and how to learn more.

Fortunately, there are many resources to help agribusinesses build or improve financial literacy, including concepts that are vital to ensuring the value of your operation.

Building a Solid Financial Foundation

One of your biggest allies when it comes to understanding finances and how to structure your performance is your local bank. Financial institutions who regularly work with ag entities can provide operation-specific insights, communicate market trends and structure loans tailored to your business needs. 

Bankers can help customers identify strengths and weaknesses within their operations’ financial structures by analyzing data and sharing comparisons to industry trends. Information like this can help you improve internal price and cost structures for more competitive industry performance. 

Your banker can also review your current financials and uncover opportunities to save on interest costs and strengthen cash flow, or help you make decisions that maintain liquidity to withstand the cyclical nature of farming.

Think of your bank as a strategic partner, offering the knowledge you need to help ensure the profitability of your business as well as its ability to adapt in an ever-changing agricultural landscape.

In addition to banker, land grant universities provide excellent resources to help you build a stronger knowledge base around financial planning and performance. Iowa State University offers Ag Decision Maker, an economics and business website, and a Beginning Farmer Center.

The University of Nebraska-Lincoln's Center for Agricultural Profitability offers farm accounting information including finance webinars, calculators and virtual Quicken training.

Kansas State University hosts the AgManager.info website, one of the premier extension sites for information on the agricultural economy, and Purdue University also provides farm management resources.

If you’re looking for an ag banker who will be there with you every step of the way, learn more about FNBO’s agribusiness team. We've been supporting agribusiness for more than 165 years through advice, insight and long-term relationships.

About the Author

Josh manages a diverse portfolio of agribusiness customers, working with his team to deliver a variety of financial solutions. He has more than 20 years of experience in banking, beginning his career at FNBO as a credit analyst.