Financial Risk
Financial Risk
In many cases farming is much more than a career, it is a lifestyle. With that in mind it is crucial for a farm to generate profits in order to operate as a successful business. Often times farmers view their finances as secondary in nature, and they do not receive the proper consideration. The bottom line is that in order to be a successful farmer you must assess your financial risks and deal with them accordingly.
Record Keeping

One of the most effective tools to mitigate areas of financial risk is record keeping. Thorough record keeping can determine the success or failure of any farm. Keeping accurate and current records may seem like a tedious task, however, it is essential to track the profits of a modern farm. Good records allow you to:

  • Measure performance

  • Analyze investments

  • Measure profitability of multiple enterprises

  • Monitor production

  • Support loan applications

  • Develop marketing plans

Accurate record keeping is one of the most effective tools in dealing with financial risk. Without record keeping, the chances of managing a successful business are poor, furthermore proper record keeping allows the development of effective financial statements.

Financial Statements

There are three necessary financial statements which include a balance sheet, income statement, and a cash flow statement. These documents provide a financial history of the farm and allow farmers to pinpoint their costs of production. It is important to review several different financial statements.

Balance Sheet — A balance sheet, also known as a net worth statement, is a summary of all assets and liabilities of the farm. The difference between all assets and all liabilities equals the farm’s net worth at a specific point in time. A balance sheet is structured in a way that separates assets from liabilities, and divides them into current, intermediate, and long term categories. This allows farmers to analyze each portion of their business. The primary use of a balance sheet is to help the farmer clearly understand his financial position and allow him or her to make sound economic decisions.

Income Statement — An income statement, also known as a profit and loss statement, reports the amount of profit a farm generates. In most cases, income statements are prepared on an annual basis in order to correctly measure net income. Income statements consist of all income generated and all expenses incurred, and generate the net income of a business over a specified time.

Cash Flow Statement — A cash flow statement is used to summarize all cash inflows and outflows over a specific time period. When used correctly, cash flow planning is the single most effective financial planning tool available to farmers. A cash flow statement is great for forecasting your financial needs and allows the monitoring of cash into and out of the farm, as well as the specific sources and uses of the cash. It is important due to the fact that many farms find it necessary to spend money before or while providing a product whereas they may not receive payment until a later date. A proper cash flow plan helps to determine how much money is needed to run your farm, and when you need it. Cash flow statements are also useful in securing loans, because many lenders may require you to prove that you can pay back your loan. Cash flow statements are often overlooked, particularly if you are able to meet your financial obligations, however, it is essential in order to get a complete picture of your farming operation.


Budgeting is an extremely valuable tool that helps you to visualize where you are going financially. In order to attain any goals you may have, you have to have a set of values to measure your progress. A budget allows you to control your money, and provides feedback to let you know whether or not you are living within your means. Budgets are a great management tool because they reveal areas where too much money is being spent, and allow you to make the required adjustments. Budgets can also allow you to plan for emergencies and unexpected large expenses. When used correctly and consistently, a budget can help a farm get out of debt, or keep it from falling into debt. Several different types of budgets can be useful to a vegetable farm including:

  • Enterprise budgets — outlook of the costs associated with producing one commodity.
  • Partial budgets — used to analyze potential changes to the farm business.
  • Whole farm budgets — financial plan for the entire farm.
  • Family budgets — used to track sources of family income and analyze spending.


Enterprise Management

In the vegetable industry, it is common for a farmer to engage in several different enterprises. The extent to which a farmer engages in other enterprises, greatly affects the farm’s bottom line. The most obvious and by far the largest of these enterprises is vegetable production. Other potential enterprises include:

  • Custom Trucking
  • Farm Markets
  • Organic Production

It is important that farmers utilize record keeping and financial statements so that they can determine the profitability of the enterprises of which they participate. When records are not kept on all enterprises it is possible for a farmer to be oblivious to the fact that they are losing money in one area, and they may in fact be better off by reducing their work load.

Extending Credit

Extending credit to customers is a good way to increase the amount of sales that your farm generates. A significant source of financial risk stems from the decision to extend credit to customers. One of the easiest ways to reduce the risks associated with extending credit is to check the history of the potential customer. A few things you should know about a potential customer may include:

  • The length of time the company has been operating.
  • The type of business structure they operate under.
  • Information about any bank accounts held by the business.
  • References and credit lines with other businesses.

The best way to gather all the information you need to make a sound decision is to require all customers seeking credit to fill out a simple application. It is important to follow through with the application by actually speaking with references and checking their credit history. Always be sure to checkout more than just one reference to assure accurate information.

Even if you take all of the available precautions, there is still a chance that a customer may not pay you, however, incidences of bad debt are greatly reduced if these procedures are followed.

Farm Service Agency

The USDA’s Farm Service Agency was developed to help ensure American farms are efficient and equitable by providing farmers with loans, emergency assistance, and conservation aid.

  • Emergency Loans: provides finances to help producers recover from production and physical losses due to drought, flooding, other natural disasters, or quarantine. The farm must be located in a county declared eligible by the President or the Secretary of Agriculture. Loss of at least thirty percent of crops or physical damages is necessary to qualify. Example: A severe drought dries out most of the county’s corn crops.


  • Crop Disaster Program (CDP): covers insured, uninsured, and non-insurable crops for qualifying losses to agricultural commodities due to damaging weather or related conditions. Funding for this program must be approved by Congress. Example: Flooding ruins bell pepper crop.


  • Minority and Socially Disadvantaged Farmers Assistance (MSDA): provides information and assistance on farm management practices to applicants in a group whose members have been subjected to racial, ethnic, or gender prejudice.


  • Trade Adjustment Assistance Program (TAA): technical assistance and cash benefits to eligible producers of raw agricultural commodities when an increase of imports leads to a decrease in price resulting in a net drop in farm income. Example: Canada increased imports of potatoes to the US causing domestic prices of potatoes to fall.


  • Farm Ownership Loans (FO): money given to producers to purchase farmland, construct/repair buildings, or improve the environmental condition of a farm. Also available to beginning farmers/ranchers. 


  • Increasing farm acreage
  • Fixing underground water pipelines
  • Planting trees to reduce erosion and sedimentation


  • Farm Operating Loans (OL): money given to producers to buy farm equipment, feed, seed, farm chemicals, insurance, and other expenses as well as minor improvements to buildings and costs to land and water development. Also available to beginning farmers/ranchers. 


  • Investing in new fertilizer supply
  • Buying annual seeds to plant
  • Need several new parts for irrigation system