How sound financial management can guide farmers in a tough economy
When times are tough, farmers with a strong grasp on business and finance - or who have partners that do - will find ways to persevere and even find success. Those that don’t are headed toward more difficult times.
Proper farm management asks a lot of farmers and those who help guide them in economies both strong and weak. When the economy has been rough and the outlook is not much better, sound financial and risk management are what separate successful farmers from the rest of the crowd.
Having a trusted farm management partner can help farmers steer toward success, but they should also have an understanding of their operations finances.
Financial and risk management checklist
Dave Kohl, an agricultural economist, professor emeritus at Virginia Tech and adviser to ag lenders, has developed a useful tool for getting a grasp on farmer finances.
Kohl has shared that both farmers and their lenders need to know where their farms stand in terms of finances and risk. To accomplish this, he has created a 15-point financial and risk management checklist that farmers can use to measure their management skills.
“It’s not rocket science,” Kohl told DTN Progressive Farmer. “But it is very insightful to see how much the manager knows about his or her business.”
The checklist walks through 15 items and assigns a range of one to four based on their answer, four being the best-possible score. Those items include having knowledge of cost of production, goals for the business (and family and personal), projected cash flow, having a marketing plan, an executed written plan for improvement and education seminars and courses taken.
Progressive businesses working to further their potential can receive extra points on certain questions, as can businesses that are struggling but trying to turn around their operaitons.
A total score of 35-50 suggests a “strong management rating and viability,” according to the scorecard. A score of 20-34 represents a “moderate risk and viability; will most likely show previous refinancing.” Finally, a score below 20 points shows a “high risk and lack of long-term viability.”
How farmers score on Kohl’s checklist
In DTN Progressive Farmer’s article, Kohl says that farmers fall into three different areas during economic downturns or rough patches:
- Forty percent will see some growth due to their working capital, equity, proactive problem solving and a high business IQ.
- Forty percent of farmers will be able to survive but will not find much success due to a low business IQ.
- The final 20% of farmers will need to liquidate either partially or totally.
As you can see, business IQ is an important factor in determining a producer’s success. Farmers and their partners who go through the checklist can get a firmer grasp on where their business IQ stands and in what areas they may need to improve or emphasize.
Having a trusted farm management partner who can help producers address areas of opportunity and emphasize strengths can also make a difference in whether a farm will grow or dwindle.
Kohl’s goals for success
Kohl has also said, as he shared in March with Wisconsin Agriculturalist, that farmers can’t control commodity prices, trade wars, tariffs or bad weather. However, he stresses that it’s important for farmers to manage what they can.
Farmers who do focus on managing what they can have what Kohl said are habits of successful producers:
- Be goal-focused.
- Invest in productive assets.
- Make modest family living withdrawals.
- Monitor cash flows.
- Use five to seven words that mean success.
- Follow the management principle of getting better before getting bigger.
- Stay positive, even in the down cycle.
Kohl goes on to suggest farmers look inward to find areas where they can grow. He also suggested seeking educational and development opportunities so that they can become even stronger in their understanding of business and finance.
There are also steps Kohl said producers can take in their personal lives that can help farmers as they strive for success. He advised farmers to exercise, unplug from technology, give back to others and position themselves for small accomplishments.
Know how where a farm operation is most efficient
In this economy, farmers should look more than ever at areas of opportunity, such as those that Kohl’s checklist.
However, there are specific steps farmers can take that can position them to survive economic downturns. That includes finding issues that prevent them from being financially resilient and getting rid of financial drains on the operation.
Charles Brown, a farm management specialist with Iowa State University Extension and Outreach, told Successful Farming that farmers should start with finding where their operation is efficient.
To do this, Brown advised farmers use a spreadsheet or their Schedule F tax records to find the percentage of gross revenues they convert into profits, not including interest or depreciation in costs. That percentage is the farm’s net efficiency. If it’s lower than 25-35%, then that could affect several areas, including debt retirement, business growth and family living.
Fix the problem areas
After determining net efficiency, you can address problem areas, or areas of opportunity for improving revenue and overall finances. Brow first suggests looking at production, marketing, labor costs, rent costs, etc. as areas that could be addressed to increase revenues.
Farmers can reduce their costs in several areas, Brown tells Successful Farming, including reducing equipment, selling machinery, letting go of unproductive land, renting fields for livestock, finding alternative crops, reducing personal costs and more.
Farmers can also look to work with each other, Brown suggests, to share equipment or share labor.
A trusted farm management partner can help
Producers or farm land owners looking to make the most out of their operations, even in a tough economy, can get a leg up on the competition by partnering with a trusted and knowledgeable farm management firm.
Cotton-Grave Farm Management is proud to offer clients, which include local and absentee landowners, investors, trusts, estates and conservatorships a wide array of services. Our team can assist with tenant selection, crop share management, cash rent management, financial management, grain marketing and more.
Contact Cotton-Grave today to discuss your financial goals for your farm.
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