This article was first published in the June-July 2026 Newsletter from Nebraska Farm Business, Inc.
With financial times like we are experiencing, you are looking for ways to cut cost, however without solid financial information, you cannot make good, informed decisions. And with times like this, you need good decisions.
Accrual vs Cash Income
A good financial analysis starts with accrual income. Unlike cash income, which most farmers and ranchers use for tax returns, accrual income is better for management because accrual income shows what the business actually earned. In farming, income and expenses for one crop often span three years, but accrual accounting puts those transactions back into the same year so you can see what it cost to produce that crop.
Financial problems usually appear sooner on an accrual basis than on a cash basis. After highly profitable years like 2021 and 2022, many producers deferred income, prepaid expenses, and bought equipment to lower taxable income. So even though profits fell in 2023 and 2024, and in 2025 for crop farmers, many tax returns did not reflect that decline right away.
Changes in net worth can offer clues about accrual earnings, but they are not enough on their own. Net worth can fall even when the farm is profitable if family living costs are high, or rise because of inheritance or other non-farm income while the farm is losing money.
Getting accrual income requires more information than a tax return including comprehensive balance sheets for the beginning and end of the year, and detailed transaction reports so we can see where every dollar coming into the farm came from and where every dollar spent went. The good news is we have the knowledge and skills to help those who don’t have complete records get them and once we have these complete records, most banks are happy to use our balance sheets to help speed up renewal time as well.
Cost of Production
These accrual-based “red flags” help producers make changes early instead of waiting until cash reserves are gone and losses have continued for years. Once you see “red flags” a whole farm look at accrual income doesn’t give us enough information to know “Why”? We really need to dig into your costs per production unit. That may be per acre, per pound, per head, etc. A whole farm analysis could tell us your accrual fertilizer costs were $200,000 but until we add in how many acres do we know if that cost is a part of the problem. For example, if you farm 500 acres, that fertilizer cost is likely a part of the problem but if you farm 2,000 acres, it’s not unless you’re under fertilizing and not getting the yield you could.
Getting good cost of production information requires more detail and precision in your records than a tax return does. We need to have some costs broken down by enterprise. Major costs like Seed, Fertilizer, Chemicals, and Feed, make the most difference in cost of production. For example, most times we see a significant difference in the cost of fertilizer applied to corn vs soybeans. Other costs like utilities, overhead insurance and depreciation may be better split per unit after the fact. If you allocate the fertilizer evenly, you’re distorting your costs per bushel which doesn’t give you good information to build a marketing plan or a production plan for the following year.
Benchmarking
Benchmarking has certainly been the buzzword in farm finances and for good reason. Benchmarking allows you to compare your operation to others to know if your costs are in line with your peers but it also works to compare to your history. Both ways of benchmarking are important. For example, let’s go back to our fertilizer example. If you spent $200,000 on fertilizer and farmed 1,300 acres, your per acre cost is $153. Without benchmarking to peers, you wouldn’t know if that’s a reasonable cost or not.
At the same time, there are measures that may make more sense to benchmark to yourself. For example, your debt-to-asset ratio may be 70%. The average would show something closer to 30% so benchmarking to your peers would look like you’re in a bad place. 70% isn’t a good debt-to-asset ratio anytime but if you are beginning your farming career and had a 80% ratio last year it’s an improvement and maybe not something to panic over. When starting out, high debt-to-asset ratios are common and making annual improvements to the number is the goal. Focusing on improving your number may be more important than how you compare to a peer group that likely includes established operations.
Making Informed Decisions
Informed decisions takes time and investment in good records but they can be the difference between a successful operation and one that struggles to keep up. Here are a couple of real examples that made a difference for operations we work with.
I was once working with a farm to put together a cash flow. I always ask what are their capital purchase plans for the year. The answer was I really need $40,000 to build a fertilizer trailer. I put that in and finished up the rest of the cash flow and the result wasn’t great. The producer leaned forward and said, if I use some used parts and things I have around here, I bet I can do the fertilizer trailer for $25,000. What does that look like? The answer was better but still not great. At the end of year, I was back with that farm and he didn’t do the fertilizer trailer at all.
He used his cash flow based on his actual costs to make an informed decision that went against his gut feeling. It would be nice for a numbers person like me to always have every decision based solely on numbers but that’s not reasonable either. In this case, the numbers helped him see the difference between what would be nice to have and what he really needed.
I was working with another operation whose costs were just too high and it was causing consecutive annual losses. Their costs for seed, fertilizer, chemicals and crop insurance were higher than their projected gross income and that didn’t consider the other costs of doing business. The input decisions were recommended by an agronomist, so I challenged the producer to go back with the numbers and ask the agronomist to re-evaluate. Whether it was different inputs, a different crop or abandoning those fields a change was needed.
They were able to come up with a better plan that gave the operation a chance at financial success because they had the information to make a good decision.
These same sorts of decisions can be applied to your marketing plan, family living spending, and many other decisions you make. The investment in a financial analysis can seem like a painful task of gathering information but the information it provides gives you invaluable information about your operation, especially when you don’t want to see it. I was once told a producer didn’t want to do the analysis anymore because the information made it hard to sleep at night. While not knowing maybe helped him sleep then, the problems that were being highlighted by the analysis didn’t go away and eventually caught up to him.
If you are interested in a financial analysis with Nebraska Farm Business, Inc., you can find more information at our website www.nfbi.net or by calling 402-464-6324.
