Farmers and ranchers across the United States have felt the pressure of declining margins over the past few years. With declining margins, proactive conversations with your ag lender become essential for the financial health of any operation. Conversations about annual projections, capital purchases, debt structure, and operating expenses should happen early in the year to allow time for adequate financial planning. At times these conversations can feel overwhelming yet having the right tools in place and understanding a few key components will turn these discussions from daunting to productive.
Breakeven – Looking ahead, the industry is projected to remain flat in terms of growth. Growers and producers will need to find ways to become more efficient and keep control of their margins while managing risk. Knowing the breakeven price on an enterprise basis is a key component to managing margins and protecting profit for the upcoming year. A couple of tools that can help farmers accomplish this are the use of enterprise budgets and a cash flow analysis of the operation.
Once growers have these, they can evaluate what financial and production risks the operation will face in the upcoming year, which allows the operator to be proactive versus reactive when making management decisions. Some common pitfalls when calculating a breakeven is failure to accurately capture fixed and family living costs. This is vital when there are no off-farm income sources to cover these expenses. Additionally, these tools can be utilized to make a crop plan to maximize the operation’s profitability. The breakeven analysis will aid in marketing commodities to cover all costs, establishing the baseline for a breakeven year.
Cash Flow – Cash flow analysis is another important tool to use. This allows the operation to visually see the income from production flowing into the operation and see the expenses flowing out of the operation. This analysis can play an important part in planning for the next year, especially when considering for operating loan needs. The cash flow tool allows operating costs to be easily tracked, allowing farmers and ranchers to monitor the operation’s operating expense ratio. Fixed costs should also be tracked and factored into the cash flow. This will allow the operation to know where the operation stands financially, throughout the year.
Business IQ – Growers should use an analysis tool to annually asset management practices. References such as the Dr. David Kohls Business IQ chart helps gauge what management decisions are successful and which decisions may need additional focus. There are key factors in the IQ checklist that are crucial to the operation and its ability to be sustainable as well as profitable. The Business IQ should be treated the same as every year-end financial document. Capturing the management progress year over year is just as important as financial progress as it shows how the operations is evolving based on management strategies.
Having valuable resources and understanding how these resources can aid in the success of an operation will allow for better management decisions while understanding the financial health of the operation. In addition to the resources and tools, it is imperative for farmers to take the time to complete the financials and to check them periodically throughout the year. The availability of this information each year to discuss with a with your ag lender will create a more dynamic conversation, goal planning, and most importantly, not be so daunting.
Conterra Ag offers a variety of real estate secured lending options. If you’re ready to refinance or have additional questions regarding the key components financial analysis, start the conversation by contacting a Conterra Ag Capital lending specialist today.
