FREEDOM FARMER BLOG

Avoid These Common Mistakes…

benchmarking budgeting farm accounting financial analysis financial literacy kpis profitability May 16, 2024

At school we were taught we always need to have the right answer. 
 
We are rewarded for being right. 
 
In business, it helps if we are right more than we are wrong… 
 
However, if we hold onto always being right, we can get stuck which can constrain our growth. 
 
As business owners, we are better off embracing the view that there are probably a lot of things we could be doing better by remaining open and questioning how we can improve what we are doing. 
 
This helps us close the gap between what we are currently doing and what is possible. 
 
Learning to ask great questions and be curious is what drives great Entrepreneurs to succeed when others fail. 
 
Today we will explore a great question that you can ask yourself as a farm business owner that will help you succeed faster and profit more. 
 
THE QUESTION IS: What is one skill that the Top 20% of Farm Owners have mastered that helps them be successful? 
 
Unlike our talents (or attributes) that don’t tend to change much over time, we can all improve our skills through education and learning from other successful people. 
 
Developing the right mix of skills is what supports us to succeed in business. 
 
As Henry Ford said, “Anyone who stops learning is old, whether at twenty or eighty. Anyone who keeps learning stays young. The greatest thing in life is to keep your mind young”. 
 
Each year our Platinum Mastermind & Alumni members (our 3-year business education & coaching program) complete a financial benchmark for their farm business. 
 
This gives them, and us, great insight into what the highest-performing farm business owners do that sets them apart. 
 
There is one skill that is common to the top performers and supports their success. 
 
Hands down the number one skill that the Top Producers consistently demonstrate is that they have a great handle on the numbers in their business. 
 
Not only do they have a great handle on their numbers, but they also make great decisions using their numbers. 
 
They test their decision-making throughout the season with their financial forecasts. 
 
To the best extent possible they take a lot of the guesswork out of their decision-making.  
 
When they see an opportunity or are facing a challenge, they use their numbers to support them in making a great decision. 
 
This gives them confidence to pursue the opportunity or tackle the challenge rather than hesitate, feeling uncertain about the financial implications. 
 
Whilst the tools they use to do this effectively vary, the Top Producers have all taken the time to master the skill of making decisions with their numbers. 
 
One of the best things you can do to improve your business management skills is to develop a cash flow forecast that allows you to predict the impacts of decisions you make over the next 3 to 5 seasons (Business Model Forecasting). 
 
This is what the Top Producers do consistently. 
 
To help you do this we have developed a training called the Cash Flow Optimiser Pack. This program will give you insights into strategic business modelling & cash flow mastery, advanced forecasting & financial planning, and resilience building. You can click here to learn more. 
 
However, it is easy to make mistakes when starting Business Model Forecasting. These mistakes limit the effectiveness of this skill in moving your business forward. 
 
The good news is that these common mistakes are easily avoidable. 
 
If you aren’t currently forecasting your business, there is no time like the present to make a start. Check out the Cashflow Optimiser Pack to help you get stated. 
 
If you are already forecasting your business, well done! 
 
I encourage you to look at what you are currently doing and see if there are any opportunities for improvement in the list below.  
 
Remember that the great Entrepreneurs are always questioning themselves on how to improve what they are doing. 
 
Mistake #1 - Assumptions not documented

The cash inflows or outflows in your cash flow forecast are the result or the outcome of the actions you take on your farm. 
 
In your Business Model Forecast, the assumptions around production, price, risk, and costs drive the cash flow. Therefore, these assumptions must be clearly stated. 
 
The best cash flow forecasts include clearly documented assumptions that allow you to change the values for these variables. When you link these with the things you have control over, as a manager, it allows you to see what the impact of a given decision has on your cash flow. This makes your forecast very actionable. 
 
Mistake #2 - Too much detail

Like any prediction of the future, there is an inherent inaccuracy in your forecast. 
 
Trying to predict income and expenses down to the nearest dollar or having lots of line items in your cash flow forecast adds limited value. It actually just creates noise and distracts you from what is really going on in your business. 
 
Too much detail is a key reason why business owners stop using their cash flow forecast as a decision tool for their business. It just takes too much effort to keep it updated. 
 
As a rule, if an income or expense does not exceed $5,000 to $10,000 per annum, then group it with other expenses. This removes the noise and allows you to stay focused on what drives your business. 
 
Just because your accounting software allows you to track things in infinite detail, it doesn’t mean it helps you make better decisions.  
 
Less really is more here and paring back your forecast allows you to gain better clarity on what drives the profitability and cash flow in your business. 
 
Mistake #3 - Inadequate timeframe (minimum 12 months but ideally 3-5 years) 

To be useful a business model forecast should span 3 to 5 years in annual increments and at least 12 months ahead in monthly increments. If you don’t do this, you risk short-term decision-making in your farm business as many things take 2-3 seasons to see the full effect. 
 
For example, selling down breeding stock this season improves cash flow in the year it happens but can drastically constrain cash flow in future years. 
 
If you are considering options through a drought or similar, it is best to consider the total impact over the 2 to 3-year lookahead rather than just looking at what is best in the here and now. 
 
Using a 3 to 5-year timeframe allows you to have this longer-term perspective and avoid reactive decision-making. 
 
Mistake #4 - Not updated regularly 

Your forecasts should be updated monthly at a minimum. 
 
Business owners who do this give themselves the best opportunity to take advantage of the good times and minimise losses in the bad. 
 
This takes discipline and some effort to get the systems sorted out in your business to allow you to have the information you need. But it is definitely worth the effort. 
 
Once you have your system set up this process can take as little as 30 minutes per month. 
 
Mistake #5 - Not structured to identify issues 

Your business model forecast should be set up to be a decision-making tool for you as the business owner. 
 
It should be structured so you can easily track cash inflows & outflows and understand what they mean. 
 
You should be able to calculate the Key Performance Indicators (KPIs) that tell you whether you are on track and headed towards your goals. 
 
The Cashflow Optimiser Pack for Farm Owners has been created to help you understand this and set this up for your business. 
 
Mistake #6 - Produced for someone else 

Your forecast is not for the bank or for your accountant. 
 
It is a decision support tool for you in your business. 
 
It is common to use a template that you have been given by a third party and then try to fit your business into this. The issue is that this is generally trying to help them see what they need not help you run your farm business better. 
 
As a farm business owner, you have the ability to (and should) know your business performance better than your banker, your accountant or farm advisor. 
 
It is your business! 
 
In Summary 
 
The one skill of the Top Producers that we benchmark have in common is that they all have a great handle on their numbers. 
 
The good news is that it is a skill that no one is born with and everyone must learn. Committing to mastering this skill will help you improve your business performance and give you more confidence in your decision-making. 
 
To paraphrase Henry Ford, to learn is to stay young! 
 
To understand this and other great skills to improve as a farm business owner, join us at the next 2-Day Top Producers Workshop. We will spend 2 days teaching you skills you can apply directly to your business and you will be surrounded by other successful farm business owners looking to learn and have a bit of fun in the process. You can attend in person or virtually.  
 
Click here to purchase your tickets before the early bird sale ends. 
 
Have a great week! 
 
Sam Johnsson 
CEO - Farm Owners Academy 
 

P.S. You can download the Cash Flow Optimiser Pack now to start mastering your financial skills.        

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