The Financial Model illustrates the management-to-decision-making process and the tools used to make decisions; it conceptualizes the financial management thought process. The farm financial model is linear and circular. Records feed into reports and reports into decisions. Reports seek additional information from records and call for additional decisions. Reports make sense of the records, allowing managers to integrate financial sense into production decisions.
Beginning with collecting and organizing financial information (records) through an accounting system, the information is next transformed into financial statements for analysis and interpretation of the farm’s historical and current financial position and performance. Budgeting, feasibility, profitability and risk-ability analyses allow for making the best decisions for the farm business’s future.
The first primary financial management report often created for the farm business is the Balance Sheet. It provides insight of farm liquidity and solvency. The balance sheet is a report of the farm business’ financial position (strength) at a point in time. Position can be analyzed and interpreted using the Farm Financial Standards Council (FFSC) measures which are applied across production agriculture.
The Income Statement is a report of the farm business’ financial performance during a given time frame. Farm performance is measured using the Income Statement. The Income Statement answers the question, did the farm generate an adequate return on the investment of your money, labor and management? Net Farm Cash Income, Net Farm Income from Operations (NFIFO), and Net Farm Income (NFI) are calculated from the Income Statement.
Accrual adjustments are made on the income statement to better reflect earned profitability performance of the farm business. Net Farm Income from Operations (NFIFO) is calculated once these adjustments are made and depreciation is accounted for. Calculation of Net Farm Income (NFI) is calculated after changes in capital assets are accounted for.
Information from the Balance Sheet and Income Statement is used to measure profitability. Profitability is the difference between the value of the goods produced by the farm business and the associated costs for producing them.
This factsheet series was developed as part of the Heart of the Farm – Farming Your Finances Workshop Series. They are authored by Sandy Stuttgen, UW-Madison Extension Taylor County with input from Heather Schlesser, UW-Madison Extension Marathon County and Simon Jette-Nantel, Nate Splett and Jenny Vanderlin, University of Wisconsin Center for Dairy Profitability.