It takes more than a love of the land and good weather to farm. It takes a sound business head. Managing farm finances may be the most difficult part of making a living in agriculture.
Taxes, operating loans, major capital purchases, labor costs – all require knowledge of financial rules and products, not to mention a good relationship with your banker or a financial expert.
Here are some of the things you will need to know to effectively manage farm finances to ensure profitability.
Cash is king. It is important to carefully examine every capital purchase that will require additional debt. Whether you are purchasing a piece of equipment or a new livestock building, the best place to start is by asking yourself if the expenditure will generate the cash flow needed to pay for itself.
Start by looking at what the financial impact will be of the item you want to purchase. Then take a global perspective and look at how the purchase would impact the overall debt and cash flow of the business.
Taking an individual and a global view is important because even if you can make the capital purchase, that doesn’t mean your business as a whole will have the cash flow it needs. If the hog building you want to purchase will make money, but the rest of the business operations are losing money, you won’t receive the overall cash flow you need.
If the new item can’t create enough new cash flow to pay for itself over a reasonable period of time or it doesn’t support the overall financial well-being of your business, defer the purchase.
Let a farm budget be your financial road map. Without a budget, you’ll be financially lost. Your budget is your financial road map and helps guide every purchase you make.
When creating a budget make sure it is realistic and the numbers are based on past performance. To create a budget that serves as a financial roadmap, it’s important to be as objective as possible. Don’t be overly optimistic with your income and super conservative with the expenses.
When creating a budget, it is important to encompass everything from crop yields to production expenses such as fertilizer, fuel, insurance, and rent. If you are in the livestock business, it is important to include the anticipated costs for purchasing animals, caring for them, and what the estimated livestock prices will be when you go to market.
Once your budget is created, don’t let it collect dust on the shelf. Make the time to review and update your budget. How often you will want to update your budget depends on the complexity of your operation. If you are a cash grains farmer, you can review and update your budget once or twice a year. If you are purchasing livestock, you will need to regularly monitor the profitability of the animals, as well as your overall budget to make sure your projections are on track.
Analyze your farm’s financial position and performance. Are you getting the maximum return from your investments? If not, why? Are your non-farm assets generating a maximum return? If not, can any be sold?
When analyzing your farm’s financial position, never be afraid of the answer to your questions. If you are not seeing the maximum return on your investments, it’s better to know sooner rather than later if the next few months are going to be tight and changes need to be made.
Managing farm finances is essential to being successful in agriculture. You don’t have to be a financial expert yourself. You can create a personal “board of directors” of people you know and respect, or contact your local farmers' network or regulatory body for guides and assistance with managing farm finances if you feel lost. If you have the funds then it may be worthwhile hiring a financial adviser with experience in the agriculture sector. Operating your farm like a business can be incredibly daunting, the key is to always know where your current financial situation is and seek help when it is needed.
Tips to helping farmers manage their finances [Retrieved from https://www.nw.bank/blog/agribusiness on 31st June 2021]