“No more harvest stress” is not entirely possible, but farmers can take various management steps to protect their business from major risks like weather, that could wipe out an entire harvest, or trade, that can make it difficult to sell the harvested crop in the time frame you would like. Financial and market risk are a couple of the most important areas to be mindful of and develop strategies to mitigate. The following are tips and best practices for you to use to reduce risk on your farm to a level where you can sleep at night no matter the weather or trade situation.
Start with a financial assessment. A farm financial assessment that is thorough, detailed and based on accurate and timely data provides the information required to identify financial risks. Having a farm market value net worth statement and personal net worth statement that is updated annually is key to knowing where things are at. Ensuring financial statements, corporate and personal income tax and day to day record keeping is current, and available for management decision making and creditor requirements, will reduce the risk of making uninformed decisions or credit decisions that don’t meet your needs.
Use accrual adjusted income to evaluate profitability. Cash basis income often lags accrual by two to three years in terms of recognizing both downturns and upturns in profitability and that’s often too late to respond.
Assess working capital and cash flow. A quick way to take a pulse check and a get an indication about the working capital and cash flow situation is by calculating your sources and uses of cash. Analyzing your short-term commitments and measuring that against your options to service those commitments will help you identify areas of strength, as well as areas that may need to be amended.
To be in a financially healthy working capital position, the farm should have at least 50 per cent of the projected operating expenses covered by your own working capital at the beginning of the productive season. Having a strong working capital position allows greater flexibility with commodity marketing, improves the ability to meet cash flow commitments on time and reduces interest costs and risk.
Knowing your monthly cash flow situation at least 12 to 18 months in advance provides you with the information you need to deal with timing issues well in advance of them occurring. It also allows you to align new or existing loan payments and create a marketing plan that aligns with your commitments.
Include accurate living expenses. Living expenses are often unknown or underestimated and can be a significant draw on the farm’s residual. Knowing what these are and how they affect your bottom line is key to managing cash flow.
Keep your eye on margins and financial indicators such as operating expense ratio or gross margins, as they are more important than absolute commodity and input price levels.
Stretched too thin? Read the archived article, “Stretched too thin? Practice saying ‘no'” It includes 10 tips to find balance and has contacts for the provincial stress hotlines.
Set a budget for capital expenses. If accompanied by large loan payments, debt service commitments can become overwhelming, constraining cash flow and eroding working capital over time. It’s easy to get to a situation where your equipment investment is more robust than necessary and this does impact your bottom line and returns to management. Having a capital budget plan in place that is updated and reviewed annually (at a minimum) will help reduce the risk of impulse purchases, keep you on track with your farm goals and vision, and keep your equipment investment in line with your operational needs.
Know your cost of production. This is key to being able to identify opportunities to make appropriate changes, reduce costs and improve profit margins. Create a cost of production calculation for each commodity you grow as well as the field or soil type where you grow it.
Base the farm’s marketing plan on ‘acceptable,’ ‘favourable’ and ‘survival’ price targets and design the plan to meet your cash flow needs. This will keep you on track and reduce the risk of making emotional decisions based on price or timing.
Create a marketing plan. Base the plan on ‘acceptable,’ ‘favourable’ and ‘survival’ price targets and design the plan to meet your cash flow needs. This will keep you on track and reduce the risk of making emotional decisions based on price or timing. Use your monthly cash flow and the cost of production calculations to design a marketing plan that is specific to your timing commitments and profitability goals.
Pay attention to the credit portfolio. This will improve profitability, overall financial health, and relationships with creditors while reducing risk. Use the right revolving credit options for maximum flexibility and minimum cost, while being mindful of the term debt portfolio details, future debt service relief and leverage positions. Knowing what your credit situation is and what your options are will help you make informed decisions and reduce financial risk.
Take care of your credit score and check your credit bureau report regularly to protect yourself against any potential fraudulent activity or errors in reporting. If you find an error, contact the appropriate credit bureau as soon as possible.
Crop insurance, hail insurance, revenue insurance, production cost insurance, AgriInvest and AgriStability are all options available to help you manage the risk of crop failure, rising costs, reduced commodity prices, marketing issues and other financial shortfalls.
Keep relationships strong with your creditors by establishing and maintaining clear and consistent communication. If you expect a change in your financial situation, due to poor crops, delayed harvest, delayed delivery, a change in your seeded acres, etc., talk to your primary creditors about it early so they can help you set up the best credit solution for your situation.
Use insurance and government safety nets. Insurance and government programs are an excellent way to reduce financial and market risk. Crop insurance, hail insurance, revenue insurance, production cost insurance, AgriInvest and AgriStability are all options available to help you manage the risk of crop failure, rising costs, reduced commodity prices, marketing issues and other financial shortfalls. Know what situations are covered and to what extent so you can relieve some harvest weather stress.
With farming comes significant and diverse risks that can and do have a negative impact on farm profits, and identifying an area of concern is the first step in working towards a solution. Although there are many similarities, every farm situation is unique and a strategy that considers the goals and vision of the farm will yield the best results and solution for your business. Many financial and market risks can be managed and mitigated with a strategy that is clear, attainable, includes an action plan and is reviewed and updated annually. Taking a pro-active approach will help you navigate your business with confidence and peace of mind while reducing stress for you and your family.