All of the farmers I know who grow food for local markets find their inspiration in environmental or social convictions. Along with the lifestyle of farming, these convictions motivate farmers to stay the difficult course of growing food for local markets without government support. I have yet to meet a farmer who considers the financial aspects of a farm their true passion. If that is you, we need to meet ASAP! Jokes aside, as one of the three pillars of sustainability, financial sustainability is a vital but often overlooked part of a farm business.

My personal connection to this topic began as a kid growing up on a farm without off-farm income and sharp seasonal and annual financial swings. The paycheck was not determined by effort or even the quality of crops for sale, but by weather in far-away places, national and international policies, and people who lived very far from the farm.

While studying agricultural economics in college, I learned that sustainable agriculture has three pillars: financial, social, and environmental. It is like a three-legged stool. Without equal support from all three legs, the stool is difficult and uncomfortable to use and could topple over at any moment. Having grown up on a conventional grain farm with no price control over the crop, I found the prospect of financial sustainability indispensable and determined to work in local food farming where farmers had more price control.

Topics related to social and environmental sustainability dominate the local food conversation, and we keep the money talk brushed under the rug. (Notable exceptions to this include Wendell Berry’s writing and the discussion around parity pricing.) We do not talk enough about how farm families may live at the poverty line, struggling to afford healthcare, a modest vacation, and retirement or college funds.

Businesses and households operate more smoothly when financial goals are clearly defined and progress towards those goals is tracked. Without financial clarity, stress multiplies on the farm and in the home, often leading to strained businesses or relationships and uncertain futures.

If any of this resonates with you, or even unnerves you, I challenge you to keep reading. As I work with farm businesses on their numbers, I am increasingly encouraged by how much can improve over the course of just a few years. Simply facing the numbers (no matter how good or bad) and opening up the conversation around finances will greatly improve business decisions. Lessons learned this year will pay dividends in future years. In that spirit, here are 10 tips to make progress on financial sustainability this year.

 

1. Create a budget and actually track it

A budget is like a yardstick. It measures the performance of your business. How can you know how your business is performing without a tool for measuring its performance? While your business will certainly not align perfectly with your budget, creating a budget allows you to make informed adjustments instead of just winging it. One aspect of your farm business may exceed your goals, a budget will show this and give you the opportunity to celebrate a win. Another aspect of your farm business may under-perform, a budget will also show this, letting you course correct as you go.

I recommend a 12-month budget, using the actuals from last year as guideposts. A budget with less than a 12-month view makes it hard to capture the seasonal swings of farming. If that is overwhelming or not possible, start by developing a three-month budget. Any budget is better than no budget. The most important part is that you track it as you go. Set a monthly date to compare your budget to your actuals.

If you are new to this, there are many budgeting tools online to get you started. For example, if your business uses Quickbooks, you can upload your budget online and easily compare the budget with your monthly actuals. Don’t overcomplicate it.

 

2. Calculate product margins

I recently spoke with a farmer who shared that they had so much money coming in and out of their business through the summer months that they do not really know where it is going or if their wholesale crops were profitable. One of the most important factors of financial sustainability is knowing your product margin — how much money you are making on a product.

This is different from the selling price of the product. To calculate product margin you need two numbers: 1. Income and 2. Cost of Goods Sold (COGS). Here is an example: A farm sold $100,000 of poultry this year. It spent $60,000 on COGS: $30,000 on feed, $8,000 on chicks, $2,000 on bedding, and $20,000 on processing. That means the product margin on poultry is 40 percent (30 to 50 percent is healthy). For every $1 of poultry income, 60 cents cover COGS. The remaining 40 cents cover fixed costs (e.g. gas, insurance,  marketing) and hopefully provides income.

Product margins can be complicated in farming when costs and income are spread over the course of multiple years. This can be navigated through inventory management, but I recommend keeping the calculation simple at first. The goal is to be able to make a good business decision. What is the point of growing that extra crop if it is not even making money for your business? You may be able to tweak the sale price (and increase the product margin), or you may decide to focus your efforts on another product. Knowing product margins will keep you from flying blind here.

 

3. Discuss financial goals with partners

Don’t get lost in the weeds, have a long-view conversation. Immediate goals should be informed by long-term (10 plus years) goals, so it is important to make clear long-term goals and to discuss them with household and business partners. For example, the owners of a farm business want to transition out of full-time farm work at a certain age. This is a clear long-term goal. Knowing this goal could lead to conversations around whether the owners plan to sell the business or assets. They could decide to vigorously fund a retirement account or be debt-free. They might get creative and sell extra equipment lying around that still needs to be “cleaned up.”

The important thing is to have the conversation preemptively before age or tragedy makes it unavoidable. Financial and lifestyle goals can and should change throughout the years. Keeping your partners in the loop is the healthiest practice for everyone.

 

4. Prepare a balance sheet

A balance sheet gives a snapshot in time of the net worth of a business. It lists your assets (what you own), your debt (what you owe), and the difference between the two (equity or net worth). Retained earnings set aside in a high-yield account and the equipment that your business owns are examples of assets. Bank notes and credit card balances are examples of debt. If your farm business has taken on debt, the bank requires a balance sheet.

If you do not have debt, you may not have prepared one before. It is a good practice to review your balance sheet annually as an indicator of financial health. As a business ages, its equity or net worth should increase, making it more financially resilient.

 

5. Stare down financial “failure” with your loved ones

One of the benefits of preparing a balance sheet is getting a bird’s eye view of your business’s solvency — the ability to cover debt. There are times when a business should shut down. Poor solvency can be an indicator of those times.

TW: Farmers have a significantly higher rate of suicide than the general population. Financial pressure is a major contributing factor. Rural isolation, uncontrollable events, and market volatility pour on the stress. I strongly encourage any farmer facing financial pressure, including poor solvency, to talk through the worst-case scenario with their loved ones and/or seek professional help. Whatever decision needs to be made, don’t make it in a silo. Pulling in your closest friends and mentors is essential to navigating a challenging decision.

 

6. Preplan monthly or quarterly financial meetings

This is the most important tip on the list. The best intentions in winter or early spring are easily abandoned when the busy season arrives. Busy months are also the months when the most money passes through your business’s doors, making it the most important time to have a handle on your finances.

If staying up to date with your finances is a chore for you, I suggest “habit stacking.” Try pairing morning yoga or coffee — anything you look forward to — with one hour of bookkeeping. This can help you avoid dropping that New Year’s resolution to stay on top of your books. Additionally, I recommend preplanning monthly or quarterly meetings to review key financial documents with your business partner. A little accountability goes a long way.

 

7. Find trusted professionals with agriculture knowledge

Another way to find accountability is by asking for help from a trusted professional. If you set a fitness goal, you might hire a trainer or attend a group class to help with follow through and to benefit from outside expertise. A trusted professional with agriculture knowledge can help you achieve your farm business goals, even when days on the farm get long and hot.

This advice is broad. Take it and apply it to tax planning, estate planning, business profitability — any area of your business where outside expertise or accountability could be helpful.

 

8. Identify as a small business owner

Learn business basics. Look for opportunities to step outside of the farming bubble and learn from other small business groups or owners. Perhaps a local group, online community, or entrepreneurship course is what you need to help grow your farm business. Even a few books on topics such as leadership, finances, and decision-making can go a long way in building resiliency as a business owner.

Farmers enter business with a range of knowledge and experience. There is no shame in asking “basic” business questions. We all need humility to learn and courage to ask.

 

9. Build a business “emergency fund”

Farm businesses experience seasonal swings of income and expenses. Even with a healthy bank balance in May, payroll in September could be stressful. An “emergency fund” in personal finance helps ease mental stress and mitigate risk as life throws curve balls.

Similarly, building a business emergency fund (retained earnings) has major benefits in reducing risk in business. There is no one size fits all with an emergency fund. You can decide how big it needs to be and how vigorously to fund it.

I recommend putting aside 15 percent of profit if your business has debt until you have saved several month’s worth of expenses in your emergency fund. You may have a different target starting out (e.g., one payroll), but whatever it is, identify the goal and make a plan for this year.

 

10. Identify your strengths

Finally, it is okay to ask for help. Quite frankly, it is almost certainly wise. While a business owner should regularly review and understand their finances, they do not have to be the one to prepare the financial statements.

I have seen too many husband-wife farming teams where the bookkeeping automatically falls to the wife. If the wife is not interested in bookkeeping or does not have the skills to do it independently, stress mounts. Identify if there is a numbers-oriented member of your team. Let them do the bookkeeping regardless of their gender or role. Maybe it is a task to outsource just like meat processing, seed saving, or barn building. If so, great. Find a proven, trusted professional and start the process.

I hope these tips help, friends! Your business is about to have another year’s worth of money run through it over this year. I hope you take this year as an opportunity to improve just a little bit over last year. If applying all 10 of these tips feels overwhelming, choose a few achievable tips from the list and focus on those. Long-term sustainability is realized through incremental change.

 

Olivia Vogel runs Marble Creek Consulting, offering bookkeeping and financial analysis services for farmers. She lives in Lexington, KY, and has worked in Kentucky’s local food system for over 10 years. She can be found at marblecreekconsultingky.com.