How can we talk about whether your farm will be able to secure financing? In order to address this question, keeping in mind that it’s June 2017 at the time of this article’s publication, we’re making the following assumptions:
- Your business’ operating loan(s) are established and adequate to meet your 2017 cash flow requirements related to sales of the remaining 2016 grain inventory, 2017 production cycle activity, and possible consideration of prepaid 2018 production cycle expenses.
- Your business’ capital loans are adequate and scheduled with payments appropriate for the projected cash flow in 2017.
For your business to be prepared to proactively secure financing for the upcoming fiscal year and/or production cycle, you as the owner or manager should implement the following measures and practices:
- Complete a 2017 entity-level budget (including both operations & capital).
- Conduct quarterly (at minimum) monitoring of the 2017 budget-to-actual reporting, including
- Operations—income, cost of goods, expense
- Capital—assets, liability, equity
Depending on what software you use for farm accounting, the tools to accomplish budget development and monitoring recommended above may already be an included feature of your farm software. If not, you may choose to use external spreadsheets for those purposes. Regardless of the tools you choose, although completion of the initial budget is important, it is equally or perhaps more critical that you have scheduled times to monitor the budget-to-actual results so that you can be proactive in your decision process as the year progresses. Farm software that incorporates tools for managing both operations and capital cash flow requirements can enhance the accuracy and ease of your financial reporting capabilities.
Is 2017 Already Tight?
Maybe the title of this article resonated with you because you’re already experiencing 2017 as a tight year on your farm. If not, great news! In either case, I would encourage you to begin implementing the practices discussed above if you haven’t already. Doing so can only strengthen your farm’s profitability and your understanding of your farm’s financial outlook. If 2017 is looking like a tough year for your farm, consider implementing the following in your business to give you a better chance at securing financing for next year:
- If not already available, complete an analysis of your current 2017 production cycle’s various enterprises (e.g., corn, soybeans, wheat, beef, pork, dairy, etc.) with regard to each commodity’s profitability so you can make appropriate adjustments. Use this information as you market your 2017 production cycle commodities while also developing your 2018 budget.
- If your crop operations involve land lease (cash rent) arrangements, complete an analysis of the projected profitability of each lease agreement. With your completed analysis, you can be proactive in negotiating these leases with your land owners for the upcoming 2018 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 need to develop an updated operations and capital budget.
- If a reduction in acres is involved, how does this impact your decisions about equipment use and possible asset action plans to pay off or pay down debt? How does this impact your farm’s financials with respect to liquidity (working capital) and solvency ratios?
Regardless of your farm’s current financial position here in mid-2017, as you move forward in securing financing for the upcoming year and future years, here are some additional questions to ask to help you work and communicate 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 agricultural expertise, an understanding of agriculture and agricultural business?
- Will the lender provide margin financing to protect or reduce 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 business’ profitability be adequate to pay the principal and interest payments?
For most farm businesses, securing financing is an essential management practice to fund the ongoing operations and capital needs. We recommend that regardless of your farm’s financial position, you be proactive in positioning your business for success.
Would you like to discuss how AgriSolutions can help you optimize your farm’s financial management to help it succeed and grow? Click the link below to request a free consultation!