As some farms face narrowing profit margins, one thing continues to emerge as a common theme: Good financial planners and risk managers will continue to survive and thrive even in this tougher economic environment.
An emerging point noted by ag banks is that they're seeing more short-term borrowing by farms to finance production expenses. It's one way that crop farms are responding to narrowing margins. But borrowing more and more to cover operating expenses is not something an operation can continue to do indefinitely. You need a long-term plan for success.
In the current environment, your farm's working capital is really important. I think working capital is kind of like oxygen. No one is usually conscious of the oxygen they're breathing in and out each day, unless we do something that makes us focus on our breath in some way, like exercising. Then we become more aware of our breathing and the air we're taking in.
We also become very aware of our need for oxygen when we don't have it. Someone who is choking on a piece of food probably isn't thinking about anything else other than the need for that blockage to be cleared and for oxygen to rush back into their lungs. At a drastic time like that, you're hyper-aware of the fact that your body needs oxygen to survive.
You can think of your farm's working capital in this way too. In good times, we might not be all that concerned about whether our farm has a healthy percentage of working capital or whether it's trending in a positive direction.
But when tough times hit and suddenly it feels like you're gasping for air, you better believe you'll be thinking about your operation's working capital and how it can help you pull through.
Whether you have done a good job building your farm's working capital over the past few years or not, you need to be keeping an eye on the direction it's heading now. Will it provide a cushion if you have a loss or breakeven year at some point? Or maybe you anticipate adding to it this year because of the risk management and financial planning you did to prepare.
If working capital is like oxygen and we're not that conscious of it unless our attention is drawn directly to it in some way, then we need time to focus on it. It may be a good idea to build in times on our farm to sit down and look at our current and projected levels, and make plans to improve or maintain it.
Reviewing the farm operation's financial position through updated numbers and projections is one way the farm's leaders can stay on top of the situation. Knowing the numbers can help them take actions that will help the operation continue being financially stable and successful.
Find more resources and information as you plan for your farm's financial future at www.waterstreet.org.
The opinions of Darren Frye are not necessarily those of Farm Futures or the Penton Farm Progress Group.