Financial risk has three basic components: 1) the cost and availability of debt capital, 2) the ability to meet cash flow need in a timely manner, and 3) the ability to maintain and grow equity. Cash flows are especially important because of repayment and family living expenses. Your objective should be to manage this risk through sound planning and financial control. To do that, you should continually monitor your ability to bear financial risk.
Farm Records and Analysis
A set of well-maintained financial records is an absolute necessity to maintaining financial control of a farm or ranch. The flow of information is critical in evaluating past performance and in planning for future accomplishments.
Financial risk management is not achieved directly by maintaining comprehensive records. However, records do provide much of the information needed to understand critical financial risks.
Essential financial statements include the balance sheet and statement of owner’s equity, income statement, and projected and actual cash flows. These records provide a history of your business and the data you need to calculate financial performance measures. Even small farms need a basic level of record keeping.