When looking at your farm’s finances, it is important to face critical business decisions head on before you discover there is not enough money to cover operating expenses. You need to determine which crops to grow, or which livestock enterprises to enter. You need to have a plan to market your crops. You need to have the right risk management tools in place, as well as sufficient insurance coverage, to protect your farm.
Beyond that, you also need to decide whether or not you can afford capital expenditures. Evaluate the pros and cons of purchasing versus leasing farm equipment. If you do not have enough capital to make a purchase, you will need to find farm financing.
Making these decisions will determine the future financial health of your farm. These decisions are never easy, and should only be made after taking a close look at your current circumstances and data-based financial projections.
We recently gave a presentation on Farm Financial Awareness at the North Carolina Farm Bureau’s “Helping Farm Families Through Hard Times” workshop, and we wanted to share information from the workshop with you here. In this post, you will learn what tools and financial models we recommend to our farm clients to fully understand your farm’s finances.
Create A Balance Sheet and Projections For Your Farm Finances
The first step toward farm financial awareness is creating a balance sheet of everything you own and everything you owe. You’ll want to create a spreadsheet listing out all of your farm’s debts and all of your farm’s assets. Accuracy and completeness are key. Any debts left unaccounted for could create further trouble down the road.
From there, you will want to create projections of future earnings and expenditures. Projections should be complete, accurate, and based on financial data from previous years. Look at your earnings from the last few years and develop a budget for expenditures.
When you are done, your farm’s balance sheet and projections should indicate both your current and future financial situation. These tools may indicate whether your farm is profitable or operating at a loss. It can also provide a framework for the future of your farm’s operations, and reveal new opportunities to increase revenue or reduce expenses.
Check Your Farm Finance’s Vital Signs
In addition to balance sheets and projections, vital signs are also critical in understanding your farm’s finances. You want to take a look at the big picture. How healthy is your farm operation? How sustainable is your farm?
First look at liquidity. Is there sufficient cash available to you to pay your farm’s bills without disrupting the business? To determine whether or not you do, you need to know how much working capital your farm currently has on hand. To do this, simply divide your current assets by your current liabilities. A good working capital ratio is anywhere between 1.2 and 2.0.
Let’s take a look at an example:
Current Assets = $27,572
Current Liabilities = $19,964
Asset/Liabilities = $27,572/$19,964
Current Working Capital Ratio = 1.38
Current Working Capital = $7,608
Another vital sign you should pay attention to is your farm’s debt to asset ratio. In other words, what is the strength of your farm’s assets against its debt? This information can be found on your balance sheet. A good debt to asset ratio will tell you whether or not your farm’s operation is strong enough to weather a bad year.
Here is an example of how to calculate your farm’s debt to asset ratio:
Total Liabilities = $454,932
Total Business Assets = $622,103
Debt/Assets = $454,932/$622,103
Debt/Asset Ratio = 73%
The final vital sign you should pay attention to is profitability and productivity. Look at your farm’s total revenue against crop expenses. Account for both fixed and variable expenses, and break it down by unit, acre and farm.
As you look at vital signs for your farm’s financial health, keep in mind the risks associated with operating the farm. Ask yourself, what would happen if interest rates increased? What if I experience a total crop loss? What if I get sick? Look for vulnerabilities and weaknesses in your farm and create a strategy to proactively deal with worst case scenarios.
Be Proactive And Talk To Your Lenders and Farm Attorney
If you realize that your farm’s finances are not in good health, you should take steps to improve your situation immediately. Talk to your lenders, especially when you realize you may not be able to make a payment. And, if you have questions about how to deal with debt, you can speak with a farm bankruptcy attorney. You may not need bankruptcy services yet, but an attorney experienced with helping farms through tough financial situations can help you avoid defaulting on your loans, missing payments and leaving money on the table.
For more information, you can call our office at 919-934-7235 or email firstname.lastname@example.org.
Farm Financial Resources:
Balance Sheet Tool:
Cash Flow Tool:
Farm Enterprise Budgets:
17 Feb 2016
By David F. Mills
This year is shaping up to be a problem for many farmers in our area. Too much rain last fall decreased crop yields, cutting into farmers’ profits and causing a shortage of soybean seed. Prices for soybeans, corn, and other commodities are well off the highs of a couple of years ago. The combined effect of these issues will likely lead to the unfortunate default by many growers on their 2015 operating loans and other farm-related debts.
Unfortunately, farmers often wait too long before seeking help. Farmers are, by nature, eternal optimists—“next year will be better.” Also, farmers in financial difficulty are worried and embarrassed. They want to keep their lender happy, keep their trade creditors (fertilizer, chemical, and fuel dealers) happy, and maintain something of a normal life. As a result, the farmer often just does nothing.
Over the past 24 years, I have represented many farmers in financial distress, including many in Chapter 12 family farm bankruptcy. I am always surprised by how long the farmer has waited before coming in to get advice and direction.
If you are a farmer facing financial difficulties, there are things that you can do proactively to get a handle on your financial situation. An attorney experienced in agricultural finance issues can help. To get a head start, ask yourself the following questions:
1. What do you own, and what is it worth? List your real estate, your vehicles, your farm equipment, and all your other assets. What is the value of each item today?
2. Who has liens against your assets? Does anyone have liens against specific equipment, or does anyone have a blanket lien on all your equipment? How about deeds of trust against your real estate, including your home? How much is owed to each of these creditors? If more than one creditor has a lien against certain assets, what is the order of their priority?
3. Are there creditors who don’t have liens (unsecured creditors)? Who are they and how much do you owe them?
4. In the last 2 to 3 years, have you completed a financial statement, balance sheet, or cash flow statement? Often you will complete these forms when borrowing money, especially through the Farm Service Agency (FSA) or the farm credit system. Are these statements accurate and up-to-date?
5. Are your assets insured, including your farm equipment?
6. Do you have any crop insurance claims, other types of insurance claims, or do you anticipate receiving a government program payment?
7. Have you made arrangements for renting land for the coming year? Do you owe any land rent from last year?
8. Has anyone filed a lawsuit against you? If so, you have only a limited amount of time to respond to it.
9. Has anyone started a foreclosure against you, or repossessed any equipment? Again, if so, you must respond within a short time or you may lose important rights.
10. Have you talked to the lenders you are unable to pay? Don’t ignore them.
11. Have you defaulted or are you about to default on a loan from FSA? You have certain rights as an FSA borrower (loan servicing options) but you must act within a limited time in order to take advantage of those options.
12. Do you have a projected budget for the current year, with projected income and farm expenses? Is it a realistic budget?
13. Do you NEED all of the land and equipment you currently own? Can you “trim the fat” and turn in or sell any of your assets? If you do, what are the tax consequences?
14. Do you owe any income taxes or payroll taxes? Are you current on your tax return filings?
15. Are any of your debts guaranteed or co-signed by someone else?
16. Does anyone have a lien on your crops?
17. What are your options for financing this year’s crops?
18. Have you talked with a lawyer who is experienced in dealing with farm debt issues, including family farm bankruptcy? Talking to me doesn’t mean that you will definitely file bankruptcy. Often, I am able to help my clients avoid bankruptcy and deal with their debt problems through a workout plan with their creditors. But bankruptcy is an option to be fully considered. Farmers have special rights and provisions under bankruptcy law to protect them from their creditors, help them reorganize their finances, and stay in business.
If you are a farmer in financial distress or have been denied a crop insurance claim, call me to schedule an appointment. We will discuss your situation and I will help you realistically identify and evaluate your options. My telephone number is (919) 934-7235.
David F. Mills is an attorney in Smithfield, North Carolina, having grown up on a tobacco farm in Jones County in eastern North Carolina. He has practiced bankruptcy law, focusing on agricultural debt relief, since 1991. He is an Adjunct Professor of Bankruptcy at Campbell University School of Law and a member of the American Agricultural Law Association.