Diversifying on-farm cash flow by adding additional sources of revenue can be a smart way to increase profitability or better withstand economic hardships. However, the venture doesn’t come without risk. Thorough preparation can mean the difference between a fruitful pursuit and an expensive undertaking.
“Farming is a lot more than just putting a seed in the ground and hoping it grows,” says Jackie Mosier, Conterra Ag Capital relationship manger. “You have to be forward thinking; you have to be disciplined in monitoring financial progress and make prudent decisions that enhance that financial progress.
Staying alert for new profit opportunities requires strong business acumen. Conterra experts refer to Dr. David Kohl’s “Business IQ” when analyzing an operation’s savviness. It doesn’t matter if it’s a hog barn, a new feedlot or a new crop altogether, the path to identifying profit and need for Business IQ remain the same.
Spotting a profit opportunity
With every new income stream should come a deep dive into every detail about the investment. Are there any barriers to entry that are out of your hands? Capitalizing on emerging market trends can be a smart way to bring in more revenue, but is there appropriate processing capacity or other resources near you? Additionally, lenders want to know if the proposed revenue source could disrupt your current operation. Compromising current financial position for a new revenue source is something ag lenders will take into consideration when looking at the balance sheet. At the end of the day, understanding the nuances of your potential investment will help a lender feel more comfortable financing your operation.
“When we look at borrowers considering a new opportunity, the first question we ask is: ‘Does it cash flow?”, adds Mosier. “But we also look at it from a knowledge standpoint. We have to assess their Business IQ.”
Business IQ checklist for new profit opportunity:
- Are there any barriers to entering the market? Does the new investment have local markets or a way to be transported to distant processing areas?
- Have you broken down your estimated cash flow from the new venture?
- Will the investment require a new hired hand? New equipment?
- Does the new investment have the potential to disrupt your core farming operation? Are you sacrificing any liquidity?
- Can you show your lender when you expect to break even? When your first profit will be?
Making the jump
Profit only comes when revenue exceeds expenses. Understanding Return on Investment (ROI) requires discipline, because at the end of the day, a farming operation is a business. Tracking expenses and monitoring every dollar is part of preparing for new financing.
“It doesn’t matter what kind of operation it is, anything over a break-even point is an opportunity,” says Mosier. “It’s understanding exactly what it’s going to cost so you know how to market in order to maximize the most profitability you can.”
Having conversations with your accountant, loan officer, tax preparer or integrator to detect input price changes or forecasted revenue changes can help your break-even point for every commodity stay top of mind.
Checklist for embarking on a new investment:
- Do you know your current break-even point for each commodity?
- What are you currently spending on inputs for each commodity?
- Do you have the financial flexibility to take on a new investment, even one that might not return profit for a couple of years?
- Do you feel confident tracking your expenses and monitoring your spending?
Talking with a local USDA or Farm Service Agency office to gather more information will serve you long term. Ag lenders can also assist as you gather background information and a plan of action for your new venture. Be curious about what has worked for others and ask your lender questions on where they’ve seen the most success in terms of other farmers increasing profitability through new investments. Having a firm understanding of both the market for your proposed venture and of the current economic outlook will set you up for success while assuring your lender you know what you’re getting into. Operating capital might be the biggest resource for your pursuit, so early conversations with your lender are critical.
Resources for preparing for new investment capital:
- Local USDA office
- Your accountant
- Other producers who have already made a similar investment
- Your ag lender
After being a good steward of on-farm finances and getting the green light for a new investment opportunity, what comes next? Conterra says one of two things will happen – either the new venture will be profitable and no additional check-ins or interventions will be needed, or there’s some uncertainty in the process and the lender will do some financial check-ins throughout the year. Your lender will put in safeguards to help ensure your profit opportunity is as successful as possible.
Have questions about potential profit opportunities or new-investment financing? Our ag lending team at Conterra would love to chat. Get in touch today.