Now is the time to set goals
Today, I am going to touch on three financial goals for your farming operation in 2023.
Build Capital / Liquidity Position – Keep Cash On Hand
A current balance sheet that tracks working capital is essential for the success of any business. Working capital is calculated by taking current assets minus current liabilities. Current assets include cash accounts, marketable inventory, prepaid inputs and any other short-term assets that can be liquidated in the next 12 months. Current liabilities include the balance of any revolving lines of credit, accounts payable, credit card balances and the principal portion of any term loan payments due in the next 12 months.
Providing a year-end balance sheet is a welcome sight to a lender and can help you see trends in your operation. If your working capital position went down, does that mean your operation was not profitable over the last year or did you utilize cash to invest in a new purchase? Building a strong capital position and keeping cash on hand helps an operation prepare for downturns but can also help when determining if a new farm purchase would be feasible for your operation. Just like much of the state saw in 2022, we can have abundant rainfall in the spring, but it can quickly turn dry in the summer. Not only do dry conditions have the potential to stunt crop growth, but cattle producers start feeding hay sooner than they anticipated. Having cash on hand can help offset unforeseen expenses.
Mitigate Risk – Crop Insurance, Livestock Risk Protection, Forward Contracting, Interest Rates
Agriculture is cyclical and mitigating risk is extremely important. Crop insurance, livestock risk protection insurance, fixed interest rates, hedging and forward contracting are a few ways to help lock in a profit. Prices go down just as quickly as they go up and events/weather across the world can affect the markets overnight. Before looking into risk protection, you must know your input costs to calculate how much gross revenue is needed to support input prices and debt payments. Having the proper insurance coverage can provide a safety net, which could be the difference between a profitable or non-profitable year.
Additionally, knowing your interest rate and options is valuable. Consider which loans are more vulnerable during a rising rate period and consider how to minimize the added cost. It is always advisable to talk to your lender and discuss your options thoroughly, but it becomes more important when there is a challenging economic environment.
Plan For The Future – Expansion
Finally, I would like to talk about planning for the future and expanding your farming operation. When the farm next door comes up for sale, it is easy to make the decision to buy, based on convenience and emotional reasons. But first, it is important to understand how the new debt will affect your cash flow and whether your operation can support the additional debt.
Is the asset you are buying an income producing asset? Will it require an intermediate term debt on a five-year term with a hefty payment? To help you answer these questions, prepare a profit and loss statement each year with all your income and expenses. Before you purchase a new property, write out a business plan and cash flow to see if expanding makes sense. If you are a cow/calf producer, you must consider adding to your herd when purchasing additional real estate. Does that mean holding back heifers or having to take out a short-term loan to purchase more cows? Can the expansion support two new loan payments? Set yourself up for success by building capital, mitigating risk, and planning for the future to help your operation succeed.
In closing, take time today to talk to your financial and insurance experts as well as your business partners. Your goals can help you be successful in 2023.
Danielle Thompson and a FCS Financial Credit Analyst