Has your farm seen good years recently? Many farms are in great financial shape right now. And that's going to be really important, especially if you're looking ahead at what ag bankers and economists are saying.
They're predicting that rising costs and shrinking margins are ahead for farms. Financial strength that you've built up in the good times is going to make the difference in the years ahead. Healthy working capital and equity can help open a lot of opportunities, even during a challenging time.
As we move through the growing season, the markets continue to be top of mind for most farmers. And that's understandable because they constantly change. There is always something new affecting the picture – demand, weather, outside markets, the global situation, the economy.
But here's something else to think about, something that ties very closely to what's going on in the markets and how you go about creating a plan to reduce your risk and deal with tough times: How's the overall financial health of your operation? What are its vital statistics right now?
If you answered, 'Great!', then my question to you is: how do you know? Do you meet regularly with your banker – not just once a year when you're asking for credit? Do you work with a financial advisor or consultant on a regular basis?
Related: Get Your Balance Sheet Ready for Higher Interest Rates
Or if you feel your farm's health might be a bit 'off,' how have you determined that? Do you feel like you have a good handle on the vital stats of your business – and what to do with them?
It's one thing to know what's going on with your current year cash flow. That's very important. But taking a step back and looking at the overall picture revealed through the numbers will give you that bigger view of what's going on.
I've talked here before about the working capital and equity to asset ratios we recommend for our clients. The goal is to have 40% of your gross revenue available as working capital. Our benchmark for the farm's equity to asset ratio is 60-65%.
Our ag finance department has been tracking these two ratios, among others. On average, farmers' net worth in their operations has grown by $1.1 million – just in the past two years. Right now, the balance sheet looks pretty good for most farms. Farm equity to asset ratios, on average, have risen from about 63.7% in 2011 to 65% in 2013.
However, many of the assets that have contributed to this increase aren't liquid – think land, machinery, grain bins. That makes it more likely that your net worth is growing but your cash resources remain limited, squeezing the operation during tighter times.
You can prepare now by knowing what the numbers are telling you about your operation – and acting accordingly. The farms that run their business by the numbers will be the ones that will survive and thrive during what could be a down cycle in Ag.
Darren Frye grew up on an innovative, integrated Illinois farm. He began trading commodities in 1982 and started his first business in 1987, specializing in fertilizer distribution and crop consulting. In 1994, he started a consulting business, Water Street Solutions to help Midwest farmers achieve success through financial analysis, insurance, commodity marketing, and legacy planning. The mission of Finance First is to get you to look at spreadsheets and see opportunity, to see your business for what it can be, and to help you build your agricultural legacy. Contact Darren at email@example.com.
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