As a young farmer growing your farm operation, you may find yourself facing many challenges in today’s financial climate: current commodity prices, rising interest rates and uncertain growing conditions all can provide financial stress.
Fortunately, there are a few key steps and business practices you can implement to ensure the longevity of your operation and its future success.
Understand and manage your margins
Margin is the income left over after you have accounted for all debt service, taxes and family living expenses. The higher the margin, the better. Margins affect nearly every business decision you make, and an adequate margin must be present prior to any major investments.
If you haven’t already, now is the time to sit down with your lender to review your financial statements. When assessing your current margins, focus on a couple areas. First, determine your current debt obligations, including current portion of term debt and interest on term debt. If your term debt levels are not in line with the size of your operation, it may be prudent to retire or restructure the notes in question.
Second, pay attention to your family expenditures. Any personal debt you take on, including mortgages and car loans, affects the bottom line of your business and should be carefully weighed as non-income-producing assets.
Finally, be mindful of the cash burn rate or cash build rate of your operation. This measure directly impacts your working capital position. In years of declining crop prices, knowing this is especially important as it can be the first indication of financial stress in the coming year.
Write a business plan every year
Commit to writing an annual business plan every year. Look at your net income versus your net expenses from the past year and consider the crop or livestock plans you have in mind. Using this assessment, make an informed estimate based on what you know and predict if your revenue will increase or decrease. Determine if you can afford to invest in your operation or if you need to make any cuts.
Document and write down your plan for any investments or necessary expenditure reductions and regularly revisit it throughout the year to keep the business on track, or to make necessary adjustments as any unforeseen circumstances occur.
Understand the purpose of your operating loan
Operating loans are designed to align with the cash flow of your business. For a row crop operation, this means utilizing the loan when input costs arise, and paying down the note upon sale of the crops. With livestock, consider the life span of the animal and base your note upon the income and expenses of the livestock turn.
Utilize the operating note for its true purpose: financing inputs during a crop or livestock production cycle. Not aligning your operating note with your working capital can leave your operation turned upside down with credit you cannot fully resolve. If you find yourself in this situation, work with your lender to develop a solution for your business.
Financial success takes planning and consistent business practices. By taking proactive steps to understand your margins, create an annual written business plan and understand the best use of an operating line of credit, you can set your operation, your family and yourself up for a prosperous future.
For additional commentary and perspective on trends affecting ag finance click HERE .
Source – AGWEB