Basic, good records give early warning of financial trouble One of the best indicators that your farm is in financial trouble will come when your banker clears his throat and says he won't renew your operating loan. By then it's too late.

Fortunately, there are early warning signs built into the financial records that farmers keep. But some don't like looking at the data while others don't know what to look for.

"We know how to produce, but we're weak on the business management side," says Harlan Hughes, a North Dakota State University ag economist. "I've had producers say, `If I had wanted to be an accountant, I would have been an accountant.' The problem is, to be a farmer you have to be an accountant, at least part-time."

Of course, looking at records can be a nightmare. There are hundreds of numbers and dozens of potential warning signs. But farmers can simplify the process by focusing on three main indicators of impending financial trouble. Used together, they give a good idea if an operation is slipping into financial hot water or already in it.

One of the best indicators is the debt-to-asset ratio. To get it, add up debts, then add up assets. If debts come to $250,000 and assets amount to $500,000, debts equal 50% of assets. And the 50% figure should trigger alarm bells.

"Once that number gets to 40%, it should start sending signals," says Hughes.

But a word of caution is in order. The debt-to-asset ratio can be misleading. For example, rising land prices can boost assets and give a false sense of security.

"You could have a pretty good balance sheet and not be making any money," says David Saxowsky, another North Dakota State ag economist. "We've had times when the balance sheet had been improving and farmers were not profitable - for instance, during the 1970s when land prices were increasing rapidly."

For that reason, farmers should also use other key indicators. One of the best is cash flow projection. That tells you whether your anticipated income will cover all your farm bills, such as machinery and land debt, annual operating loans, hired help and taxes. If projected cash flow falls short, you'll need to cut costs or find new income.

When figuring cash flow, crunch the numbers. Don't rely on off-the-cuff projections.

"Most people use their checking account as a measure," says Hughes. "It's not accurate enough and family living expenses may be coming out of that. Family living should be kept separate so that they know what the business is doing."

A second word of advice: Make the cash flow projection several times a year because it can vary dramatically as commodity prices rise, fall and sometimes crash.

"It's one thing to do it in February," says Phil Burns, chairman of Farmers & Merchants National Bank, West Point, NE. "I don't think it hurts to do it through the growing season to make sure you're still on target."

Burns also suggests multi-year cash flow analysis. "If cash flow is going to be short this year, will it be any different over the next two or three years?" he asks.

The third area to look at is profitability. Check profitability two ways. Look to see if the overall operation is making money. But also calculate whether each component of your operation is making money. Many farmers raise more than one crop and some also have cow-calf or feeding operations.

There are two good reasons for crunching the numbers both ways. In one scenario, says Saxowsky, the farm could be turning an overall profit. But lumping all the numbers together may hide the fact that there are a couple of real money losers lurking in the operation.

Or, he says, the farm could be losing money overall. But by looking only at the big picture, you may not be able to spot the money-making components.

Calculating profits separately for each crop or livestock enterprise requires work.

"The challenge here is the record keeping and knowing which costs need to be attributed to each activity," says Saxowsky. "If I use my combine in all three crops, how much do I allocate to each one?"

One more thing to keep in mind when calculating profits: Be sure to include the value of inventory.

"You could produce a year's worth of soybeans and put them in the bins," says Hughes. "You don't have any income, but you've got the beans." These could be converted to cash instantly, he says.

Few people like to spend their time crunching numbers. Fortunately, computer accounting programs, which many farmers use, make it easier to generate key financial data. Moreover, loan applications require farmers to assemble data to get a loan.

Often, much of the information you need to check for early warning signs can be found on the application. For instance, if you compare loan applications for the past five or 10 years, you may be able to see quickly if your debt-to-asset ratio is deteriorating.

If you check profits, cash flow and debts regularly and keep careful records, you stand a much better chance of spotting trouble while you still have time to do something about it. You might defer a new pickup, sell land while land prices are up, or concentrate on crops with the best profit potential.

"People should make decisions at a time when they still have options," says banker Phil Burns.

If you wait, options narrow. For example, if the farm crisis worsens, a lot of people will be selling real estate and that will depress land prices, says Burns. Or, he adds, interest rates could rise and that would depress prices.

No one knows how long the current farming crisis will last. But if the crisis lingers, careful analysis of farm books could help avert disaster for many farmers by showing them where to cut, where to expand and where to stand pat.

"Typically, they wait until the banker tells them there's a problem," points out Hughes. "That's too late."