It seems that each year throws new challenges at farmers, and 2020 is looking to be no exception. Every farm business is individual, and conditions are constantly changing. For the purpose of addressing the question posed in this article’s title in May of 2020, however, we will make the following assumptions:
- Your business’s operating loan(s) are established and adequate to meet your 2020 cash flow requirements related to sales of the remaining 2019 grain inventory, 2020 production cycle activity, and possible consideration of prepaid 2021 production cycle expenses.
- Your business’s capital loans are adequate and scheduled with payments appropriate for the projected cash flow in 2020.
Agricultural Accounting Essentials
To prepare your business to proactively secure financing for the upcoming fiscal year and/or production cycle, implement these measures and practices:
- Complete a 2020 entity-level budget (including both operating and capital budgets).
- Monitor 2020 budget-to-actual reporting quarterly (at minimum):
- Operations: income, cost of goods, and expenses
- Capital: assets, liability, and equity
Farm Management Software
Depending on what you use to process your farm accounting, the tools you need to accomplish these budget development and monitoring tasks may already be included in your farm software. If not, you may choose to use external spreadsheets for these purposes. While completion of the initial budget is important, it is perhaps more important to regularly monitor the budget-to-actual results so that you can make proactive decisions throughout the year. Farm accounting software that provides tools for managing your business’s total cash flow requirements for both your operating and capital budgets improves the ease of use and accuracy of financial reporting.
Data for Smart Decision-Making in Tough Times
While we’re anticipating the possibility of another financially tough year in 2020, perhaps your present financial outlook is just fine? If so, that’s great news! I would still encourage you to begin implementing the practices described above, as they can only strengthen your farm’s profitability and your understanding of your farm’s financials. If your 2020 is already looking tight, however, consider implementing the following practices in preparation to secure financing for the next year:
- If not already available, complete an analysis of your current 2020 production cycle’s various enterprises (e.g., corn, soybeans, wheat, beef, pork, dairy) with regard to each commodity’s profitability to assist you in making appropriate adjustments. Use this information as you market your 2020 production cycle commodities while also developing your 2021 budget.
- If your crop operations involve land lease (cash rent) arrangements, complete an analysis of the projected profitability of each lease agreement. Your completed analysis will prepare you to proactively negotiate these leases with your landowners for the upcoming 2021 production cycle.
- Depending on your situation and the level of profitability projected from your land lease negotiations, if a “worst case scenario” develops where you may be faced with not renewing the lease agreements on a portion of the land, you will need to develop an updated operations and capital budget. If you need to reduce acres, you will have to consider how this impacts things such as
- Your decisions regarding equipment use
- Possible asset action plans to pay off or pay down debt
- Your farm’s financials with respect to liquidity (working capital) ratios and solvency ratios
Regardless of your farm’s current financial position here in mid-2020, as you move forward in securing financing for the upcoming year and future years, here are some additional considerations for working with and communicating with your lender(s) or prospective lender(s):
- Is the lender large enough to accommodate your present and future credit requirements?
- Does the lender have expertise in agricultural finance? Do they understand the agriculture business?
- Will the lender provide margin financing to protect or lower your revenue risks?
- Is your relationship with your lead lender open and friendly?
- Do you have access to and utilize more than one source of financing?
- Are interest rates competitive and loan conditions appropriate?
- Will your farm’s profitability be adequate to make your principal and interest payments?
For most farm businesses, securing financing is an essential management practice for funding ongoing operations and capital needs. Whatever your farm’s current financial position, being proactive in preparing to access the financing you’ll need in the future is key to positioning your business for success. For more information about your farm's finances, download our free ebook!