We learned a lot at last week's first Ag Finance Boot Camp. But perhaps the biggest take-home message was this: now, more than ever, good records really do matter.
Quality financial records help farmers manage risk, one of the biggest threats to farming. A good set of records helps you navigate around risks and make changes or decisions that strengthen the business.
It also helps your lender feel confident in doing business with you.
"My goal is to get a producer to do balance sheets for themselves to see the value, and then also, for the banker," says Steve Witges, regional vice president for Farm Credit Illinois. "It takes the fear of the unknown out of the picture. Even in years when the margins don't look that great, a good set of records is a huge benefit in the lender-borrower relationship."
Good financial records allow us to do 'what if' scenarios. You know your expenses, for the most part, through 2014. If you have this part of the equation figured you can more clearly see how to manage profit margins and projected sales targets.
"A good set of records conveys your business savvy," adds Witges. "It tells us, 'you know what's going on.'"
How much liquidity do you need in your working capital? Farm Credit traditionally asked for 15% of gross farm income but today that may be too low for grain farming, says Witges. "In fact, we keep track of all our loans the last three years and over half of the underwritings have working capital of over 50%."
Can you ever have too much liquidity? If you're conservative the answer is no. It depends on economic conditions and uncertainty. And, your balance sheet leverage.
"If you're heavily indebted we like to see more working capital," says Witges. "It's a defense against volatility."
Yet, there's a cost or a risk associated with anything - even cash liquidity. The cost of cash in the bank is that you're not earning anything, he points out.
There's a number of ways to start building your business and financial skills. You can try hiring a consultant or accountant; in some states you can work with extension. Annie's Project, a special educational program just for farm women, is set up in 34 states now. Some states have management associations you can enroll in. The Illinois Farm Business Farm Management Association is one example. If you're investing in financial software, make sure you also get the support service to make sure it's doing what you need it to do.
One of your goals should be to develop accrual statements to get a better picture of farm financial performance.
The agriculture outlook remains positive; we have a large population to feed. However, this doesn’t mean we should expect ample profit margins every year, adds Witges.
"The next 2-3 years will likely offer challenges, but risk management tools exist today we didn’t have in the 80’s," he concludes.
Once you're up to speed with your books, statements and skills, you will be more confident if stressful times hit the farm.
Save the date: We're planning more Ag Finance Boot Camps for the future, including one next Jan. 6, 2015, at the St. Louis Hilton Ballpark Hotel. Watch this blog for more details.