Capital is the lifeblood of business.
A business can't grow without access to capital through debt and equity. Most farms grow and prosper through partnerships with banks and their own wealth, built over time.
Use these five strategies to improve your working capital position on the farm.
1) Eliminate nonproductive assets
A word of advice:
If you haven't used it in two years, sell it, rent it out, or scrap it.
Farmers are often guilty of collecting junk. That’s not a good business decision.
Turn everything you don’t use regularly into cash. Cash is way more valuable than junk, as we’ve talked about in the past (“Farm Finance, Cash Is King”)
2) Refinance any debt to improve interest rates or terms
Interest rates are really good right now. If you have 10 years left on a land loan, you may want to go to your bank to refinance it into a 30-year deal at a better rate.
Banks are always looking for good places to park money, and land debt is relatively low-risk. If you can refinance or “re-term” your mortgage on your land or house, that’s a great way to get extra money.
Also, if you’re buying any equipment or small pieces of land up to $300,000, you can do really nice loans with the government and get crazy-good rates. I just bought some farmland at 2.25% interest over 40 years; that cash flow is really nice, to say the least.
Try to refinance to get your terms down so your annual cost of capital is as low as possible.
3) Invest excess cash into productive assets
This is what I learned from studying Warren Buffett: capital allocation is what grows your business and net worth.
So many farmers tell me, “I didn’t sell my grain last July because I didn’t need the money.” But if you’re basing your business decisions on whether or not you need the money, you should find another occupation. Running a business is not for you.
It’s not about whether you need the money: it’s about the best decision to make for your business. Yeah, you’ll have a big income tax liability, but you’ll also have tons of dry powder in cash to buy things when there’s an opportunity.
Say you made a million dollars last year and you had to pay $400,000 in income tax . . . that’s a good problem to have. Now you’ve got $600,000+ in your after-tax cash.
If somebody next door is having a problem and offers to sell you a quarter of land right next to you in exchange for $500,000 because they’re struggling, it’s a done deal. You write the check and acquire the land for half market price, because you can. Quickly use cash then refinance that land to get your cash back. The enemy won’t wait for you to load your guns. You must enter battle with a loaded gun. Think about that: huge opportunities come to those who are prepared. There is no luck, there only preparation and patience.
I recommend that everyone read The Richest Man in Babylon. It’s one of my favorite books because it’s all about making your money work for you.
The rule from that book is, 10% of all I earn is mine to keep. If you take the 10% and invest it, just like Buffett, you’ll see it snowball into huge amounts of wealth.
4) Use government programs to increase cash flow
I mentioned this in point #2 about refinancing, but there are also CSP, EQIP and CRP programs to consider.
If you’ve got a 100-acre field, and 10 of those acres are always wet or problematic, go ahead and turn that into CRP. You can probably collect anywhere from $80-150 a year per acre on that land, and you’re not wasting seed or fertilizer.
Use these programs wisely. I think the farm programs are some of the lowest-hanging fruit and great ways to increase little dividends.
Don’t be scared off by a bit of paperwork.
5) Stress test your fields and commodities
Stress test your fields and commodities to make sure you don't have any leaks in your profit-producing assets. A solid farm financial software such as yours truly at Cash Cow Farmer will easily help you do this and track it for years to identify trends.
Here’s an example: my dad invented something called the Anderson opener about 35 years ago, and it kind of revolutionized the small grain market. Instead of using a box drill, spreading fertilizer, and putting seed in, he invented a way to do that all at once. It works extremely well for small grains, which led us to farm wheat.
We farmed wheat for a long time, and when I got back from New York later I stress tested the wheat and found that we were losing money (or barely making it) versus our alternative commodities.
I wanted to drop wheat, and dad was against it. But at the end of the day, he trusted me. We haven’t farmed wheat for four years, and our profit margins have risen hugely because we don’t have wheat sucking the profit away.
Wheat has gone from a low profit to a negative profit. Just about every one of our customers loses money when they farm wheat. Especially when looking at prices over the past 12 months.
This example shows why stress testing your fields to make sure your field economics aren’t bringing your profits down; then stress testing your commodities, is so important.
There are a handful of ways you track this:
-Pen and paper
-A farm financial software program like Cash Cow
Cash Cow in particular will tell you how to alter your rotation to make sure you’re growing what the market is interested in consuming. You will know exactly what commodities and fields are making and losing money for you.
It’s nice to have a system in place to help you track and improve your farming decisions, rather than doing the same thing all year.
Don’t get stuck in the same old program your dad or grandad did. Farming’s different; it’s dynamic, constantly changing; it’s not like it used to be, where you make money if you just work hard.
Today, you’ve got to run your farm like a Fortune 500 company. You’ve got to crunch numbers, analyze things—there’s a lot of extra work for farm managers nowadays.
You don’t have to be overwhelmed by that work, though. Follow these steps and use the tools and resources available to you, and watch your working capital grow and stay constant.
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The opinions of the author are not necessarily those of Farm Futures or Penton Agriculture.