Reaching a position of financial security does not happen by accident. When cash flow issues are present, ignoring those problems tends to allow them to grow. While those in the ag industry are typically known for making frugal business decisions, they also realize that capital and working capital are imperative in both good and bad years. There are a few approaches that farmers and ranchers can take to establish a solid financial plan that increases their access to cash flow and better positions them for future success.
Do Your Homework
Determining your operation’s costs helps you track your cash flow. Completing your balance sheet provides you with a better understanding of the financial condition of your operation. Using that knowledge, you will be more prepared to embrace the opportunities that are appropriate for you and avoid those that are not. Work with your ag lender, accountant, or financial consultant to create an accurate cash flow projection to help prepare for and make the right decisions for your operation. Knowing your breakeven is extremely important whether you’re producing corn and soybeans or raising livestock.
Use Your Return-on-Investment Filter
There is no room for impulse buying in ag operations. New equipment seems enticing; however, it may not bring enough of a return to justify the purchase. When your current equipment is operating at a satisfactory level, the ROI on new equipment is low. Conversely, investments in upgraded technology that increase your efficiency, save you time, or reduce waste can realize a much higher ROI. A regular review of expenses can reveal areas where investments will most likely increase cash flow.
Know What You Are Signing
When considering financing opportunities, closely scrutinize the real cost of financing, including things such as prepayment penalties. It is imperative to find a lender who specializes in ag loans and is transparent about the true costs of borrowing. Never shy away from asking questions to improve your understanding of your financing agreements and contracts.
In trying times, when your cash flow is strapped and your expenses are skyrocketing, an established relationship with your lender is crucial. If your lender is not willing to maintain a responsive, transparent, and useful relationship with you, you may want to consider finding a different partner. A good lender understands the volatility of ag markets and strives to offer solutions that provide long-term benefits and bring stability to your operation. This relationship is one of the most important aspects of the success of your farm or ranch and must be evaluated objectively.