Farm Financial Awareness: Understanding Your Farm’s Finances

Farm Financial Awareness: Understanding Your Farm’s Finances

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 david@mills-law.com.

 

Farm Financial Resources:

Balance Sheet Tool:

https://www.ces.ncsu.edu/wp-content/uploads/2015/01/Farm-Balance-Sheet-Tool-1.xlsx

Cash Flow Tool:

https://www.ces.ncsu.edu/wp-content/uploads/2015/01/NCFS-Cash-Flow-Tool.xlsx

Farm Enterprise Budgets:

https://cals.ncsu.edu/are-extension/business-planning-and-operations/enterprise-budgets

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