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Home > Agriculture > Electives > Agribusiness > Assessing the financial situation of a farm

Agribusiness - Elective 1

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Assessing the financial situation of a farm

This material addresses aspects of the following syllabus outcome:

The work presented in the following section contributes towards achieving the following syllabus content area:

• analysing the financial situation of a farm using a variety of techniques.

Source: NSW Board of Studies Agriculture Syllabus

Farmers are no longer just people who grow crops and animals well. The modern farmer is also a business person who needs to apply a variety of techniques in order to analyse how the farm is performing financially. Techniques available to farmers to assess the financial situation of their farm fall into several areas. These activities are designed to help students apply the techniques and gain an understanding of how a farmer might use the information to help them manage their farm.

1. Assessing patterns over time
2. Comparing key financial indicators
3. Evaluating the risk
4. Evaluating margins

Assessing patterns over time

In order to gain a better understanding of the current financial situation of the farm, a farmer should analyse the trends over time of several financial indicators. Analysing these indicators over the short term (1-3yrs) and long term (5-10 yrs) will improve the accuracy of the analysis.

Some important financial indicators include:

• commodity prices
• input costs
• debt level
• asset level.

The piece of work entitled Assessing patterns over time will give you an opportunity to complete activities that assess patterns over time.

Comparing financial indicators

Farmers should compare their farm with other farms. They may use different levels of information. Local, district, state or national averages with different levels of accuracy will provide farmers with information for comparison to see how their farm is performing.

Some common measures used to compare include:

• gross margins
• production levels
• owner's equity
• return to assets.

The activity Comparing key financial indicators will give you an example of how farmers can compare their return to assets.

Evaluating risk

Farming is a risky business because production depends on the natural environment. The ability of farmers to produce goods to sell may be influenced for example by drought, floods and the ability of plants and animals to resist disease and pests. Fluctuating commodity income and rising input costs also have an impact on the ability of the farm to be profitable. The risk associated with producing goods to sell and then receiving adequate income for those goods should be assessed when analysing the financial situation of a farm.

The activity Evaluating risk gives three examples of evaluating risk: evaluating the effect of disease; evaluating the effect of changeable markets; and evaluating the effect of drought on profit.

Evaluating margins

The level at which the farm is currently operating is at a certain level of production and efficiency. Farmers can investigate the effect on the financial situation of the farm of changing the level at which various activities are performed. For example, what would happen if the farmer employed another worker for 3 days a week, or leased the neighbouring farm for 12 months?

This unit enables students to practise several financial techniques used by farmers to assess the financial situation of their farm