Communicate: Farm businesses often have their own individual challenges and rarely does a “one-size-fits-all” approach work. As such, it is critical that you be in continual communication with all your business partners, particularly with your lender.
Know your numbers: Without quality financial and production records, it is difficult to have an accurate picture of the current and projected status of your business. A financial assessment involves more than tax records and checking account status, it should also include key metrics such as Net Worth, Owner’s Equity Ratio and Working Capital (see the latest Dollars and Sense). It is also critical for all farms to have an accurate assessment of their cost of production of each business enterprise.
Talk to the Experts: Now is a good time to reach out to others to seek advice on the best management practices to maximize your productivity while keeping input costs in check. Many farmers today are making use of their creativity and innovative-spirit to effectively and efficiently spend a dollar to generate revenue.
Look for market opportunities: Knowing your cost of production allows you to know target prices needed to secure a profit. Keeping an eye for marketing opportunities that may, at a minimum, lock in a profit is a better strategy than hoping to hit the market high when you are ready to sell.
Protect your products: Recent changes in USDA programs and crop insurance offerings creates opportunities for most farms to utilize some form of margin protection or insurance product to protect the commodity revenue they raise.
Be wary of unsecured debt: When traditional financing tightens, it is tempting to turn to credit cards or other forms of unsecured debt. Like all forms of debt, it is important to have a repayment plan in place before activating a line of credit. Unsecured debt can also affect traditional forms of lending as it affects your debt-to-asset ratio and your credit score.
Be open-minded: Each agriculture economic cycle is unique and today’s environment requires new navigation. It may be time to revisit existing management practices and take a hard look at “the way things have always been done.”
Evaluate all spending with a new point of view: A critical review of all spending, including family expenses, is necessary to endure challenging times. Categorize your spending into what is essential and what is discretionary. Preparing and sticking to family and farm budgets provides a road map on how you plan to get from Point A to Point B.
Have an exit plan: Considering an exit strategy for your business is a difficult task, but an essential planning step if you are to protect your remaining net worth. Your exit plan should establish financial triggers that will signal when it is time to exit part or all of the business. All parties with an ownership interest should be involved in the development of the financial triggers to ensure there is agreement at the start of the process. Making this decision at the front-end of the process when there is time helps make those tough business and family decisions less about emotion and more about facts.
Communicate, Make a Decision and Execute the Plan Again!
Work closely with your lender and other trusted advisors. They can help you evaluate your plans and identify potential solutions. This works best when they are a part of the conversation early on. Waiting too long or making financial decisions without consultation of trusted experts will limit your options. Ultimately, you will need to make a decision and execute the plan to the best of your ability.
If you would like more information on how to navigate these tough financial times, reach out to your local GreenStone branch to speak to a financial services officer or a tax and accounting specialist.