Financial Trend Analysis – Why You Need It

Financial trend analysis can tell you a lot about the health of your operation.  Just like monitoring trends in your herd can tell you a lot about the herd’s health, a financial trend analysis can tell you a lot about the overall health of your operation.  We’re not going to dig into the specifics of financial trend analysis because there are endless resources available that can help with calculating and interpreting certain financial ratios and their trends.  A simple internet search for “financial ratio trend analysis” will bring up numerous places to start.  The objective here is to inform you of the value of financial trend analysis and how you can implement it into your operation to set yourself above other operators.

You can think of financial trend analysis as the gauges of success of your operation much like the gauges on your pickup or tractor tell you information about your equipment.  Each gauge tells you something different and some require more regular attention than others, but together they are all necessary to indicate whether or not your equipment is operating properly.  In financial trend analysis, certain measures by themselves are more indicative than others, however, when taken as a whole, a financial trend can tell a lot about the health of the business.  They can tell you if your operation has too much debt leverage, whether or not you have enough liquidity within your business, how productive your labor force is, how efficiently your assets produce earnings, and again, the list goes on.

Once you start to implement a financial trend analysis and begin to interpret the data it can assist you in determining if your operation is becoming financially weak.  A good financial trend analysis will include multiple indicators to be useful, however, it must be kept summarized enough to allow for easy analysis and interpretation.  Building a meaningful trend analysis does take time and effort and there are multiple facets that go beyond the simple cash-basis books and records that many operations maintain.

A good set of cash-to-accrual conversions will be the starting point for compiling the bare bones data for financial trend analysis.  Cash basis records will provide very limited information and much of it will give you false indicators so an accrual basis set of financial statements is necessary.  A balance sheet and income statement should be the minimum, and a cash flow statement will allow for additional analysis.  After you have this information you can begin compiling the trend analysis data that is meaningful to your operation.  Each operation will have a different set of indicators that are most useful.  Next you’re ready to analyze and interpret your data.  This analysis will help identify areas of concern and then allow you to formulate a plan to address those concerns.  When you have well-developed trends it is much easier to identify when the financial ratios are going outside of acceptable ranges.  The more years of data you have the more normalized your trends will become thereby making interpreting them much easier.

By implementing these steps you’ll have one more tool in your toolbox to ensure the continued success of your ranch.  It may not sit next to the 3/4” end wrench, but is just as useful and will provide a wealth of knowledge of what makes your ranch tick financially.

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