Domination Over Inflation

Farmers in business for a while will remember – and young farmers may have heard stories of – trying times in the 1980s. Interest rates rose to astonishing heights, reaching upwards of 20 per cent, while commodity markets bottomed out, leaving many farmers struggling.

While today’s rising costs may seem all too much, we have been here before. Canada’s farmers have the ability and tenacity to persevere!

How?

The best way to get through difficult times is to first understand where you are. Canada’s farmers have told us that unpredictability of the sector is their number one cause of stress (Farm Management Canada report Healthy Minds, Healthy Farms, 2020). The good news is, there are ways to reduce this uncertainty, even when it seems like everything is outside of one’s control. Here are seven financial management strategies and techniques farmers can use to gain control, and peace of mind, no matter what the world throws at them.

Up-to-Date, Accurate Financial Information

Financial management starts with a good financial record-keeping system and access to accurate, up-to-date information. Even better? A system that allows for various financial scenarios to be explored. For example, what happens when the cost of fertilizer goes up, or interest rates rise? Will the farm be OK?

Using accrual-based accounting provides a more accurate picture of your financial situation as sales and purchases often happen outside of the current production year.

Financial Literacy

Financial literacy is the capacity to understand financials and financial reports – to be able to read, understand and interpret the business’s balance sheet, income statement, cash flow and financial ratios to understand its financial position and options. Of course, accountants, lenders and financial advisors can help interpret financial information for decision-making, but farmers need to have an understanding of their financial information as well.

Budgeting and Planning

Budgeting and creating a financial plan are key to tracking financial performance. Without a budget and plan, how does a farm know if it’s moving towards its financial goals? Farms may want to create budgets for each product or enterprise. Going beyond whole farm analysis can show which business ventures are making or, potentially, losing money.

Take a look at year-over-year trends for the farm and compare performance to industry standards to identify areas or improvement and greater efficiency. Farmers may ask themselves, how come I’m getting less for my products? Or, how come my input costs are so much higher?

Farmers who plan ahead not only experience greater peace of mind (Healthy Minds, Healthy Farms 2020), but also, increased profitability (Farm Management Canada report Dollars and Sense, 2015).

When planning, farmers are encouraged to use contingency planning to plan for best, worst and most-likely scenarios on the farm. The most-likely scenario typically becomes the plan they choose to follow, but if circumstances change they already have a plan in place to guide them through the unexpected.

Review farm plans with farm business experts (accountants, lawyers, financial planners, tax planners) to help ensure the plan is realistic and hasn’t missed any crucial information that may impact success. Outside experts can also help farms take full advantage of government programs and maximize tax benefits. They can also track financial performance and make adjustments when necessary.

Cash Flow

“Cash is king” is a phrase often heard in business. Creating a cash flow budget will help farms monitor cash coming in and going out of the business and ensure the farm has sufficient cash to make payments throughout the production year. A cash flow budget can also ensure enough liquidity (access to cash) to deal with unexpected risks or opportunities as they arise. Can your farm survive if your market shuts down for a while? Can you afford that new parcel of land that unexpectedly came up for sale? Perhaps by restructuring purchasing and payment contracts, farms can re-balance to optimize cash flow.

Access to Capital

Access to capital is crucial for every farm. Buildings, machinery and inputs are not cheap and there is often a significant delay between production and getting paid. It’s important to establish a positive relationship with lender(s) to build trust and capacity to repay debt. Meet regularly with lender(s) to help them understand the nature of the business and build their tolerance for risk. They can also help farms structure debt so that it works for the business. And don’t be afraid to shop around for best options. Prepare a business plan, budget and financial plan and bring them to meetings with lender(s). This can give lenders confidence in the business and enhance long-term viability.

Capacity to Service Debt

Knowing how much debt a farm can service in both the short- and long-term is a crucial component of financial management. Consider options when making purchase and leasing decisions and don’t be afraid to shop around for the best rates and service from lenders. Stay informed of potential changes to interest rates or other policies that could affect debt servicing and restrict the farm’s debt level, bearing in mind our previous discussion on cash flow. Farms may also want to think about consolidating debts to ease payments and reduce interest rates.

Insurance

Obtaining adequate farm insurance coverage on assets and production can also help build the farm’s capacity to service debt and manage cash flow when faced with production and/or price challenges. Look at AgriInsurance and AgriStability under the government’s Business Risk Management (BRM) suite of programs. There are also private insurance options.

Farm Management Canada and MNP have joined forces to offer a Farm Financial Fluency training program for producers across Canada. Producers will learn how their financial information can be organized for timely analysis and interpretation and how to use basic financial tools to calculate their financial position, options and explore what-if scenarios. Training sessions are scheduled from October to March. Please visit our program webpage at fmc-gac.com/fff for more information.