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Farming is an unpredictable business, and farmers are no strangers to the ups and downs of the market.
While it's important to enjoy the good times, it's equally important to plan ahead in preparation for the potential challenging periods at your ag operation. Here are some recommended strategies to help proactively manage your farm finances for those "down" years.
Before using capital with higher costs, it's helpful to have a cushion of cash reserves that can help you weather any financial storms that might come your way; aiming for at least three to six months of operating expenses in reserve is a prudent goal.
By having a strong grasp on your operation’s production costs, you can make informed strategic decisions about when to sell and at what price, allowing you to establish minimum profitable selling prices for all your commodities.
Refinancing can often help you lower your total annual payments in order to increase the cash you have readily available for other operational needs, potentially by extending repayment periods or securing lower interest rates.
Selling equipment you don't use often, buying generic crop inputs instead of more expensive branded options, and purchasing machinery in partnership with other nearby operations can help you reduce your overall operational costs, thereby improving your net profit margin even with stable revenue.
Consider incorporating value-added crops, growing alternative crops on non-productive land, or pursuing other new revenue streams like livestock, trucking, partnerships with local businesses and markets, or other unique alternatives to diversify your income sources and potentially bring in additional revenue, reducing reliance on single commodity prices.
By doing more custom work at your ag operation, you can potentially add revenue without additional capital requirements. However, it’s important that you charge enough for this work in order to be profitable. Spend time researching and considering a fair rate to ensure your new strategy will be profitable before pursuing this approach; calculate your true costs per hour or per acre to set competitive yet profitable rates.
Providing additional income and access to benefits can help keep your farm finances in good shape. Evaluate off-farm jobs that can provide a steady stream of income, especially during periods of low farm profitability.
It's important to look at how much of your farm income is used to support personal expenses. Reducing family expenses can free up money to use for your ag operation, directly improving the farm's cash flow.
Staying in consistent communication with lenders and landlords (and maintaining a strong relationship with them) can be beneficial in the event you need to renegotiate terms in the future, potentially leading to flexible payment arrangements during challenging times.
It's a good idea to ask people who have expertise in areas beyond your scope of experience for their guidance. For example, talk to older generations of farmers about how they successfully managed downturns and seek out advice from professionals in the industry, leveraging diverse perspectives and specialized knowledge to make informed decisions.
Without a doubt, managing farm finances during the “down” years can be challenging. However, these tips can hopefully serve as useful tools to help your ag operation stay prepared for any financial hurdles that may come your way.
With an average of 15+ years’ experience each in ag finance, FBN loan advisors are ready to talk to you regarding any questions you may have related to your farm finances, potential financial solutions or other financial strategies for your ag operation. Click here, complete the brief form below, or call 866-619-3080 to speak to a member of our team today.
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