The financial side of farming is complex. It is not unlike any other multi-million dollar business. Many farmers prefer to focus on the production side instead of the finance aspect of farming. Production is absolutely the most important element. Without bushels it's hard to make the rest of it work.
When farmers first partner with our service they typically bring along some financial problems. Oftentimes the problems have been compounding, while at other times one has a great business operation but is doing too many things at once and begins to lose track of details. The way farming is today, these mistakes can add up quickly.
Where do mistakes come from?
One origin is commodity marketing mistakes. Life is busy, and if you are not focusing your attention on the markets daily they can get away from you. It's important to know your long term break evens allowing you to execute a marketing strategy and arrive at profitability. If you don't know the target, it's a lot harder to hit it. If it's not possible for you to spend a lot of time on marketing, get someone to help you. However, don't delegate the decisions. You should understand the strategies and still be calling the shots. A client who recently partnered with us had a marketing company who put on positions. Neither the farmer nor the marketing firm made any adjustments as prices changed dramatically. This was a problem.
Expanding blindly is another potential for mistakes. Expansion must always be done very carefully. You must understand how the extra spending will affect your cash flow during every phase of the process. Know your working capital going into a purchase and what it will look like after the purchase.
We recommend a ratio of working capital to gross revenue at 40%. When you're getting ready to grow, build it even higher- especially for a land purchase. Then figure where you will be after the purchase, aiming as close to 40% as you can. It is wise to have a feasibility study done ahead of growth or large purchases. This will help you understand the investment and the return.
Weather is always a factor worth considering. Years such as this one with crazy weather patterns can dramatically affect yields. Not being insured correctly and selling forward can move you into an uncomfortable spot. Don't let the size of the premium bother you. When insurance coverage is protecting yield and revenue it'll protect your bottom line. As a business owner, if I had the opportunity to guarantee revenue in my business the way a farmer can with crop insurance, I'd buy it every time.
What if you have already made a few of those mistakes? Now what?
Become very familiar with your numbers. Build a budget for the upcoming year and stick to it. You may not be able to completely turn things around in a short period of time, but understanding those numbers and living by them will help. Talk to your banker. Gain an understanding of what led to the problems and communicate your plan to turn things around. Discuss what you're changing to avoid similar mistakes in the future. Your banker needs to know that the money he is investing in you will be returned. Show him how that will happen.
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