Farm Business Management Associations Provide Decisionmaking Help

Today, more than ever, farmers need sound help with management decisions. They also need access to financial data retrieval systems that provide information required for farm decisionmaking. They can obtain this assistance at a relatively small cost by joining a farm business management association.

Many States have these associations, and farmers who participate in them report that they receive valuable benefits from association membership. In Illinois, where the first formal association was organized in 1924, there are now over 7,000 members of farm business management associations.

Strength in Numbers

A farm business management association is a group of farmers who organize into a small cooperative and assess themselves fees to secure the services of a farm management specialist (sometimes called a fieldman because of the large amount of time spent in on-farm visits with association members).

The farm management specialist assists them in gaining greater control over their farm businesses and a better understanding of their businesses through objective analysis. This is usually the first step toward taking actions to increase profitability.

The associations' major functions include helping members to make major management decisions and use appropriate technologies to make successful decisions and increase farm profits. In the process, the farmer increases his or her business management skills.

In most cases, associations are organized as nonprofit corporations in conjunction with the Cooperative Extension Services of State land-grant universities. Farm members control each association and elect a board of directors to carry out association policies, develops budgets, and establish and collect membership fees. State Extension Services often help associations get started, organize, and secure start-up funds. Once an association is securely established, membership fees usually cover a large share of operating costs. However, the Extension Service often continues to provide limited funding.

The relationship between associations and State Extension Services benefits the entire farming community by providing valuable farm record data for use in Extension programs and agricultural education and research. Association members often make valuable contributions to other Extension and research programs by assuming leadership roles in these programs and participating in demonstration farm activities.

Recordkeeping

One of the most important benefits of belonging to a farm business management association is the help members receive in keeping complete, accurate production and financial records. Members are encouraged to keep records for the entire business, not just those needed for tax purposes. Farm records may be kept in a handwritten record book, an on-farm computer, or an association-owned computer.

The records cover cash income and expenses as well as inventory data on the quantity and value of feed, crops, and livestock at the beginning and end of each year. The records also include an inventory and utilization record of all farmland (owned and rented); crop production records; livestock birth and death records; and numbers and weights sold, purchased, and consumed.

Balance sheets are prepared to account for all inventory, purchases, sales, production, and on-farm uses. Asset values and liabilities are recorded, as well as accounts payable, accounts receivable, and prepaid expenses. (See Part III, Chapter 1 on recordkeeping.)

Cash-Flow Analysis

Once all monthly transactions are recorded, the farmer can generate reports using written records or, if available, a computer. The farmer compares the actual cash-flow of income and expenses with the projected cash-flow. Cash-flow analysis is a basic management tool that is taught and monitored by the association's farm management specialist. At year's end, the detailed records are summarized, and both individual and comparative analysis reports are prepared. (See Part III, Chapters 3-7 on budgeting, accounting, and financial analysis.) These reports are particularly helpful in:

Measuring the performance of the farm business;

Comparing the performance of one farm with that of similar farm businesses;

Determining what can be done to improve the future performance of the farm business.

Although data from individual farms are confidential, association members pool information from their farms with that of similar farms to generate comparative reports. The comparative reports usually include:

Accrual basis profit/loss statements;

Sources and uses of funds statements;

Beginning and end-of-year net-worth statements;

Financial ratios and changes in net worth reconciled to the profit/loss statement;

Calculations on returns to unpaid family and operator labor, interest earned on equity capital, and; management returns;

Rate earned on the farm investment.

Other reports cover information on individual farms' crop and livestock enterprises, including costs and returns per unit of production and a wide range of enterprise efficiency factors.

The individual and comparative reports provide a data base for assessing the farm's current financial status and identifying the farm's strengths and weaknesses.

The farm management specialist assists each farmer in preparing cash-flow budgets and projecting the impact of decisions concerning liquidity, solvency, net worth, and profitability. For tax purposes, farm records are used to prepare cash or accrual basis Schedule F's, detailed depreciation schedules, depreciation schedule summaries, investment credit recapture forms, Form 4797's, Schedule SE's, and so forth.

Farm Management Specialist's Role

The farm management specialist plays a key role in the functioning of the association and in assisting individual members. The specialist, who is professionally trained and experienced in farm management, meets with each member four to six times a year and holds additional conferences if special needs arise. The specialist reviews the farm's business records for completeness and accuracy during each meeting.

The specialist's most important contribution is helping the farmer use those records to assess the farm's current status in relation to past performance and helping the farmer plan for the future. The specialist does not make decisions for the farmer, but he or she helps the farmer see the situation more clearly and explore the likely consequences of available alternatives.