Financial Forecasting for Agricultural Success

Financial forecasting provides farmers with the roadmap they need to maintain healthy cash flow and run a profitable enterprise. However, a shifting regulatory landscape, variable crop yields and market fluctuations make financial planning for farmers challenging. If you want to run a more efficient, profitable farm, the tips in this guide can help you gain the insights you need through financial forecasting to help your business thrive. 

What Is Financial Forecasting in Agriculture?

Financial forecasting in agriculture means creating a detailed map of your farm’s estimated income, expenses and profits over the coming year. You base these estimations on your past financial records, market trends, weather predictions and other data points that influence how much your farm is likely to earn and spend. Farmers use financial forecasts to inform purchasing decisions, prepare for challenges and plan strategies to increase profits. 

Why Practice Financial Forecasting?

Financial forecasting unlocks several benefits for farmers, including:

• Guiding strategic decisions: Financial forecasts can help you assess your farm’s capacity to afford strategic moves like expanding operations, upgrading technologies or diversifying crops.
• Optimizing resource allocation: Your forecasts can help you identify which areas of your operations need investment most and what resources you’ll have available to invest over the coming year. These insights can inform decisions like how many laborers to hire during each season, how much fertilizer to buy and when to upgrade equipment. 
• Mitigating risks: Even the best-managed farms face risks like unfavorable weather, pests and price fluctuations. Financial forecasting involves anticipating these risks and planning how to protect your profits in various scenarios. For example, if you’re a wheat farmer and your forecast indicates this commodity’s price will drop later in the year based on market data, you can negotiate futures contracts to lock in favorable prices now.
• Improving cash flow: Understanding what your income and expenses will be at each point in the coming years is essential for healthy cash flow. Forecasting can help you decide when to schedule important purchases or pursue financing to avoid cash shortages.

Six Steps to Strategic Income Forecasting for Farmers 

If you want to maximize the benefits of financial forecasting for your farm, these six best practices will help you make accurate and insightful forecasts. 

1. Choose Your Forecasting Method

Multiple valid forecasting methods exist. You can combine methods to get a balanced perspective, but focus on a few key approaches so you can understand and practice them. For example, you could use a combination of:

• Budgeting: Every farmer should have a budget for the coming year, starting with estimated income from sales and other sources. Then, list and subtract expenses like fertilizer, fuel and labor. Do this for each month of the year, noting your farm’s net financial position at the start and end of each month. 
• Time series analysis: By studying your farm’s production and sales data over the last several years, you can identify trends and seasonal variations to help inform your budget for the year ahead. 
• Scenario planning: Project the worst, best and most likely scenarios you can realistically estimate, and develop a plan for each. These plans are often weighted to help you create a final scenario. The most likely scenario should be consistent with your overall data trends and best predictions, while the worst-case scenario could involve a drought and falling prices, and the best-case scenario could involve high yields and a sudden rise in demand for your produce. You might weigh the worst case at 20% likelihood of occurring, the best case at 30% and the most likely at 50%, then combine outcomes for a final estimate.

2. Identify Your Key Performance Indicators

Define the most important metrics of financial success you want your forecast to reveal so you can ensure it has the necessary data to tell you about those metrics. Typical farm finance KPIs include:

• Net farm income (NFI): This is the total profit your farm earns over a year after subtracting all operating expenses.
• Revenue per acre (RPA): This is a farmer’s income per acre, calculated by dividing the farm’s gross revenue by the total acres of land farmed.
• Break-even point (BEP): This is the total sales volume you need for your farm’s total revenue to equal its total costs, with lower sales volume resulting in a loss and higher volume resulting in a profit.
• Cash flow: This is the total amount of money moving in and out of your enterprise at any given time. Even if you project a profit at the end of the year, it’s important that you have enough money available to cover expenses each month, or you’ll need extra financing to make it through that year.

3. Collect and Analyze Historical Sales Data

Gather as much data as possible about your income, expenditure, sales volume, yield, prices and profits from previous years. Having a reliable system for tracking expenses will allow for more dependable historical data when you look for trends. Combine this information with broader market data like average prices, supplier costs and labor rates in your region, as well as weather patterns. You can also perform variance analysis to identify what is driving changes in year-over-year comparisons. Bringing this information together for trend analysis allows you to answer questions like:

• What is my profit margin on wheat likely to be if diesel goes up 5%?
• How much will my corn yield drop if July rainfall is less than an inch?
• How many extra laborers do I need for harvest, and how much will it likely cost?
• What happens to my total labor costs when the farm labor market is decreasing?

4. Develop a Comprehensive Budget

Use your current and historical income and expenditure data, as well as insights from analyzing historical trends and present market factors, to create a detailed, accurate budget. Benchmarking against industry standards can also be key in assessing your performance and identifying areas where you can improve. Remember to account for seasonal variations in crop and supply prices, break income and expenditure down into narrower categories, and project your cash flow for each month.

5. Update Forecasts Regularly 

Schedule forecast updates at least quarterly. The farming industry is complex and has its share of unexpected twists, but adjusting for these along the way will improve the accuracy of your year-end forecast and the effectiveness of your planning.

6. Partner With an Agricultural Accountant 

The more complete and accurate your financial records, the more reliable and insightful your forecasts will be. An experienced agricultural accountant can help you organize and maintain your farm’s financial records while supporting your financial planning process.

Why Trust Polston Tax Resolution & Accounting on Agricultural Finance?

Since our founding in 2001, Polston Tax Resolution & Accounting has grown to provide accounting, financial planning and tax preparation and resolution services to clients nationwide. As a full-service tax and accounting firm, we have award-winning professionals with knowledge across multiple dimensions of agribusiness accounting. 

We have helped many commercial agriculture companies adopt the generally accepted accounting principles (GAAP) necessary for reliable forecasting. We leverage our extensive industry comprehension and personalized approach to provide financial planning support tailored to each farm’s unique needs. Our years of experience in agribusiness accounting have given us an in-depth grasp of the meticulous record-keeping practices and data-driven strategies needed to prepare and understand financial forecasts for farming.

Streamline Your Farm’s Financial Planning With Polston Tax Resolution & Accounting

Implementing the financial forecasting best practices in this guide can help you run a profitable farm and secure the cash flow you need for important purchases. Even when you understand what goes into financial forecasting, collecting and organizing the data required for an impactful forecast can be challenging to balance with your primary duties as you cultivate your farm’s growth. You can simplify financial planning while driving profitable results by partnering with Polston Tax Resolution & Accounting.

Our award-winning accounting and tax professionals are seasoned in helping agribusinesses manage their finances for enhanced insights and improved cash flow. When you partner with Polston Tax, we can get your farm’s financial records in order and provide personalized support for forecasting and planning, including tax planning, to protect your farm’s income. This support means you can focus on building the farming business you love while we handle the number-crunching. 

Schedule a free consultation to discover how we can help streamline your farm’s financial planning.