MANAGE Program Can Help Map Your Farm Finances


Collage of spare change

F​​arm financial planning is used to evaluate the overall health of the farm business and determine the direction the business is going.


A good farm financial plan can serve as a map to your farm finances. Farm financial planning is used to evaluate the overall health of the farm business and determine the direction the business is going.

Chuck Danehower, an area farm management specialist with University of Tennessee Extension says honest self-assessments are key to p
rofitability. “First develop a realistic income or profit and loss statement. The income statement is composed of gross farm income minus cash farm expenses. This equals net cash farm income. Subtracting depreciation then will give you net farm income,” he said.

Doing these calculations by hand can be a daunting task, Danehower admits. “Fortunately, we have computer programs available that make it easier and allow us to do actual and ‘what if?’ analyses. These valuable comparisons allow producers to examine alternatives and their likely consequences on paper before putting them into practice.”

The University of Tennessee Extension MANAGE program uses the Finpack financial analysis software developed at the University of Minnesota (
http://www.cffm.umn.edu/finpack/producers.aspx). It can perform a very good analysis on a farm operation, providing good information from the farmer is available. It can assist producers in making an informed decision on their farm operation. UT Extension provides this as a free and confidential service. Other states have similar services. Check with your County Extension Office for more information on farm financial planning.

If you want to go the traditional route, Danehower says to start by developing estimated yields, prices and expenses for each crop or enterprise. “I develop these on a per-acre basis then multiply them by the acres of each crop. This is beneficial in developing your crop budget. A comparison of your crops can be made and can aid in profitable crop selection,” he said. “Realistic yield estimates are essential. Usually a 3-5 year average will suffice.” He said. Of course, price estimates should also be realistic, not just the projected highs, he cautions.

While individual crop income and expenses can be developed on a per-acre basis, some income and expenses such as fuel, repairs, insurance, custom hire, and interest are easier to estimate on a whole-farm level. Danehower says after subtracting cash farm expenses from gross farm income, you will then have net cash farm income.

Next, subtract depreciation to give you net farm income. “Although depreciation is calculated for your income taxes, it may or may not be the appropriate num
ber to use,” Danehower says. “Using a depreciation number that is based more on the age and life of your equipment will give a more realistic number than just using one for tax purposes. This will give you some level of the profitability of the farm business as well as profitability measures such as rates of returns on assets and farm equity.”

It’s important to measure of the liquidity of the farm business and how well it will handle farm payments, family living, income taxes and whether a cash surplus or deficit is projected after everything is taken into account. To project the liquidity of the farm business, first take the net cash farm income, add any nonfarm income and then subtract family living, and estimated income taxes. This gives a good picture on what is available for principal payments, according to Danehower.

“After subtracting annual principal payments on loans, we now have a picture on whether a cash surplus or a cash deficit is projected. This is also known as the capital replacement margin or what is available for unforeseen circumstances,” he said.

Regardless of whether you choose to use the UT Extension MANAGE program or choose to crunch the numbers on your own, Danehower says it’s important to get a realistic handle on your farm’s profitability. 

For more information, follow Danehower’s farm management advice online at the UTcrops.com​ newsblog.


Through its mission of research, teaching and extension, the University of Tennessee Institute of Agriculture touches lives and provides Real. Life. Solutions. 
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Contact:  

Chuck Danehower, 731-635-9551, 
cdanehow@utk.edu 

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